Question

Case 2 Activity-based Costing (ABC) vs. Time-based Costing Hello company manufactures three products, A, B and C. Forecast data concerning overheads (indirect costs) of the products for the next period as follows 120 Forecast output100 (units) Machine hours per3 unit Number customer orders Number of quality 20 control inspections Number engineering consultancies Areas workshops (m 150 2 of 10 15 25 10 30 of 200 500 300 Cost pools and related cost drivers Cost pool S Machine operating 24,000 Order processing 5,000 Quality control 6,000 Engineering consultancy 3,000 Rent of the campus 10,000 Cost driver Machine hours No. of customer orders No. of quality control inspections No. of engineer consultancies Areas of workshop:s Requirea Calculate the overhead cost to be absorbed by each of the products using the following absorption costing methods (1) A traditional absorption method based on a machine hour rate (2) An activity-based method, using the relevant cost drivers to trace overhead costs to the individual products

Answer 1

(1)Traditional System based on machine hour rate:

	A	B	C
Number of Units	100	120	150
Machine Hours per Unit	3	5	2
Total Machine hours	300	600	300
Overhead Cost	12,000	24,000	12,000

Note:Total Overhead Cost of $48,000 allocated in the ratio of 3:6:3

(2)USING ABC

Cost Pool

Overhead	Cost	Driver	Quantity	Rate/Activity
Machine Operating	24,000	Machine Hours	1,200	20
Order Processing	5,000	Number of orders	50	100
Quality Control	6,000	Number of QC Inspections	60	100
Engineering Consultancy	3,000	Number of Engineer Consultancies	10	300
Rent	10,000	Area	1000	10

Allocation of Overheads

	A	B	C
Machine Operating	6,000	12,000	6,000
Order Processing	1,000	1,500	2,500
Quality Control	2,000	1,000	3,000
Engineering Consultancy	900	1,800	300
Rent	2,000	5,000	3,000
Total	11,900	21,300	14,800