Question

Use the information provided below to calculate the unit overheads cost using Activity Based Costing.

INFORMATION The output of Project K of Turbo Limited is Product A and Product B and the company is keen on applying the principles of ABC costing. Relevant information pertaining to the two products for a given period appear below:  

	Product A	Product B
Output in units	240	180
Machine hours per unit	7	5
Direct materials	R100	R80
Direct labour cost per unit	R49	R35

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

Currently the production overheads are absorbed by using a machine hour rate, and the total of the production overheads for the period are as follows:  

Machine department costs (rent, rates, depreciation and supervision)	10 320
Set-up costs	5 040
Stores receiving	3 720
Inspection/Quality control	2 100
Materials handling and dispatch	4 620

   

The cost drivers to be used for the overhead costs are as follows:

Set up costs	Number of production runs
Stores receiving	Requisitions raised
Inspection/Quality control	Number of production runs
Materials handling/Dispatch	Orders executed

The number of requisitions raised on the stores was 40 for each product and the number of orders executed was 42, each order being for a batch of 10 of a product

Answer 1

Answer with working notes is given below

Unit overheads cost using Activity Based Costing Product Overhead cost per unit $63.75 Product B $58.33 Working notes Calculation of Activity rates Activity Total Activities Machine department costs Set-up costs Stores receiving Inspection/Quality control Materials handling and dispatch Total budgeted indirect costs Total Overheads $10,320 $5,040 $3,720 $2,100 $4,620 $25,800 Activity rate $4.00 Per machine hour $240.00 Per production run $46.50 per store requisition $100.00 Per production run $110.00 Per order executed Allocation of Overheads - ABC method Cost activity rate Activities used Allocated Cost Activity Product B Product 1,680 12 Machine department costs Set-up costs Stores receiving Inspection/Quality control Materials handling and dispatch Total ABC allocated indirect cost $4.00 $240.00 $46.50 $100.00 $110.00 Product A T $6,720 $2,880 $1,860 $1,200 $2,640 $15,300 240 $63.75 Product B $3,600 $2,160 $1,860 $900 $1,980 $10,500 180 B $58.33 A/B Total Output Overhead cost per unit Working notes for Cost drivers Product Product B Total Budgeted output production run size Number of production run Stores requisition Order size Number of orders executed Machine hour per unit Output Machine hours 7.00 240 1,680 900 2,580