Ubben Ltd (“the Company”) manufactures Model X, Model Y, and Model Z. The direct labor hourly rate is £7.00. The selling prices, budgeted production, and direct production costs (per unit) are presented below:

REQUIRED:
(a)How would an organization go about designing an ABC system? Describe the two-stage allocation process of ABC costing and explain how this differs from the approach used in traditional absorption costing systems.

(b)Using the information provided above and ABC costing, calculate the full cost of production and the full cost per unit for each product at Ubben Ltd. In your answer, ensure you clearly show the direct costs and indirect costs by activity for each product. Show your workings to two decimal places.

(c) Discuss whether you think ABC could be implemented in a service organization. Explain your answer. Provide examples to illustrate your answer.
 

Transcribed Image Text:

Model X Model Y Model Z Budgeted production (units) Direct labour cost per unit (£/unit) Direct material cost per unit (£/unit) Number of Machine Set-ups 7,000 12,000 5,000 5.00 5.00 5.00 0.20 0.30 0.30 300 400 600 Number of Purchase Orders 200 100 100 Number of Production Runs 120 100 80 Machine hours per unit (hour/unit) 0.5 2.0 1.0 The Company currently uses an Activity Based Costing (ABC) system. Overheads have been analysed into different activities and the following breakdown of costs have been identified by activity: Machine set-up costs (£) Ordering costs (£) Production scheduling costs (£) Machinery costs (£) 200,000 150,000 100,000 130,000 580,000 Managers at Ubben Ltd have identified the following relevant cost drivers which they believe are appropriate for allocating overhead costs: Activity: Machine set-ups Cost Driver Number of machine set-ups Number of purchase orders Production scheduling Number of production runs Purchase orders Machine hours Machine hours Model X Model Y Model Z Budgeted production (units) Direct labour cost per unit (£/unit) Direct material cost per unit (£/unit) Number of Machine Set-ups 7,000 12,000 5,000 5.00 5.00 5.00 0.20 0.30 0.30 300 400 600 Number of Purchase Orders 200 100 100 Number of Production Runs 120 100 80 Machine hours per unit (hour/unit) 0.5 2.0 1.0 The Company currently uses an Activity Based Costing (ABC) system. Overheads have been analysed into different activities and the following breakdown of costs have been identified by activity: Machine set-up costs (£) Ordering costs (£) Production scheduling costs (£) Machinery costs (£) 200,000 150,000 100,000 130,000 580,000 Managers at Ubben Ltd have identified the following relevant cost drivers which they believe are appropriate for allocating overhead costs: Activity: Machine set-ups Cost Driver Number of machine set-ups Number of purchase orders Production scheduling Number of production runs Purchase orders Machine hours Machine hours

Answer rating: 100% (QA)

Answer A iABC is mostly utilised in the manufacturing business since it improves the accuracy of cost data resulting in almost actual costs and better ... View the full answer