Question

ABC QUESTION: Owl Ltd This company has a subsidiary called Birdy Limited and is worried about the costing process Birdy Ltd makes two products, Feathers and Claws. It currently recovers overheads using a rate per direct labour hour. Information relating to each of these products is set out below. Claws £91 18,000 units 800 5 hours Feathers Selling price per unit £52 Annual sales volume 15,000 units Number of sales invoices issued each year 200 Labour time per unit 2 hours Labour rate per hour £10 Material cost per unit Size of each production batch 750 Bought-in parts per unit Machine set-ups per batch £10 £25 £30 1,000 MAD Sem 7

Answer 1

Dear student,

first of all we will calculate Traditional full cost method of overhead absorption:

                                                                                                          Feathers         Claws

(1) Direct labour cost

    - (15000 units * 2 hours * 10)                                                      300000                

    - (18000 units * 5 hours * 10)                                                                             900000

(2) Material cost

     - (15000 units * 25)                                                                      375000

     - (18000 units * 30)                                                                                                   540000

(3) Overhead cost

(absorbed on the bsis of labour rate per hour)

- 240000 bifurcate in 10 : 10 ratio                                                   120000              120000

Total                                                                                         795000                 1560000

Then we will calculate cost as per activity based costing:

(1) Direct labour cost (as per above discussed)                                                   300000                    900000

(2) Direct material cost (as per above discussed)                                          375000                            540000

(3) Bought in parts handling cost 96000 60000 36000                      (bifurcated in 30000:18000 ratio ) (working note a)

(4) Material handling cost 38000                                                                   20000                                  18000

(bifurcated in 20:18 ratio) (working note b)

(5) sales invoice cost 20000                                                                          4000                                         16000

(bifurcated in 200:800 ratio) (working note c)

(6) machine setup cost 26000                                                                         8000                                       18000

(bifurcated in 40:90 ratio) (working note d)

(7) All other overhead 60000                                                                           15000                                     45000

(bifurcated in 30000:90000 ratio) (working note e)

TOTAL                                                                                                                782000                                 1573000

Working notes:

a.

Bought in parts cost is based on number of bought in parts which are 2 and 1 per units .

Total number off bought in parts :

2 * 15000   and 1 * 18000

Thus bought in parts are 30000 and 18000 respectively.

Bought in parts cost is based on number of bought in parts which are 2 and 1 per units .

Total number off bought in parts :

2 * 15000   and 1 * 18000

Thus bought in parts are 30000 and 18000 respectively.

Bought in parts cost is based on number of bought in parts which are 2 and 1 per units .

Total number off bought in parts :

2 * 15000   and 1 * 18000

Thus bought in parts are 30000 and 18000 respectively. bought in part cost is based on number of bought in parts which are 2 and 1 per units.

Total number of bought in parts:

2 * 15000     and    1 * 18000

Thus bought in parts are 30000 and 18000 respectively.

b.

Material handling is based on number of production batches.

number of batches are

feather 15000 units / 1 batch of 750 units

claws 18000units / 1 batch of 1000 units

Thus it should be 20:18 respectively.

c.

sales invoice are 200 and 800 given it self in the question.

d.

machine set up cost is based on number of set up. Number os setup is given per batch

thus total number of setup would be

feather 2 * 20

claws 5 * 18

Thus it should be 40:90 respectively.

e.

All other overhead are based on total labour hours.

Total labour hours are

feather 15000 units * 2 hours

claws 18000 units * 5 hours

Thus it should be 30000:90000 respectively.

Activity based costing (ABC ) is always suggestible over traditional based costing.

We hope your query resolved. Even if any query persists then kindly let us know so that we can resolve it asap.

Best of luck for your studies.