XYZ Ltd. currently makes and sells four products. They provide you with their details and relevant information for one period in the following table. As you have recently just learned about activity-based costing (ABC) you decide to experiment by applying the principles of ABC to the four products.

Product	A	B	C	D
Outputs in Units	120	100	80	120
Cost per unit	(£)	(£)	(£)	(£)
Direct material	40	50	30	60
Direct labor	28	21	14	21
Machine hours (per unit)	4	3	2	3

The four products are similar and are usually produced in production runs of 20 units and sold in batches of 10 units.

The production overhead is currently absorbed by using a machine hour rate, and the total of the production overhead for the period has been analysed as follows:

Machine department costs (rent, business rates, depreciation and supervision)	£10,430
Set-up costs	£5,250
Stores receiving	£3,600
Inspection/Quality control	£2,100
Material handling and dispatch	£4,620

You have ascertained that the ‘cost drivers’ to be used are as listed below for the overhead costs shown:

Cost	Cost Driver
Set-up costs	Number of production runs
Stores receiving	Requisition raised
Inspection/Quality control	Number of production runs
Material handling and dispatch	Orders executed

The number of requisitions raised in the stores was 20 for each product and the number of orders executed was 42, each order being for a batch of 10 of a product. You are required

1. to calculate the total costs for each product if all overhead costs are absorbed on a machine hour basis;
2. to calculate the total costs for each product using activity-based costing;
3. to calculate and list the unit product costs from your figures in (a) and (b) above, to show the differences and comment briefly on any conclusions which may be drawn which could have pricing and profit implications.
4. Large service organizations, such as banks and hospitals, used to be noted for their lack of standard costing systems, and their relatively unsophisticated budgeting and control systems compared with large manufacturing organizations. But this is changing and many large service organizations are now revising their use of management accounting techniques.

Requirement:

Explain the uses of activity-based costing in the service industries.

Answer rating: 100% (QA)

Step 1 Traditional costing system is an cost accounting method used to determine the cost of ... View the full answer