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 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 £25 Size of each production batch 750 Bought-in parts per unit Machine set-ups per batch 5 hours £10 £30 1,000 MAD Sem 7 The Finance Director of Birdy Ltd has recently produced the following analysis of overheads and their relevant cost drivers. Type of overhead Bought-in parts handling costs Materials handling costs Sales invoicing costs Machine set-up costs All other overheads Total overhead costs Cost driver Number of bought-in parts Number of production batches Number of invoices issued Number of machine set-ups Labour hours 96,000 38,000 20,000 26,000 60,000 240.000 Required: (a) Calculate the total cost per unit and profit per unit for each product using: (1) The traditional full cost method of overhead absorption. (2) The activity-based costing method. (b) Comment on your findings. MAD Sem 7

Answer 1

Answer to A)
Calculation of total cost per unit and profit per unit for each product :-
1) Under traditional full cost method of overhead absorption							2) Under activity - based costing method
		In Pounds							In Pounds
Product	Feathers	Claws					Product	Feathers	Claws
i) Labour cost per unit (Given Question)	20	50					i) Labour cost per unit (Given Question)	20	50
ii) Material cost	25	30					ii) Material cost	25	30
iii) Overheads cost	4	10	Refer note 1				iii) Overheads cost	4.85	6.58	Refer note 2
Total cost	49	90					Total cost	49.85	86.58
Selling price (Given in Question)	52	91					Selling price (Given in Question)	52	91
Profit per unit	2	1					Profit per unit	2.15	4.42
Note 1
							iii) sales invoicing costs	Feathers	Claws
							No. of sales invoice issued each year	200	800
							Total of invoice is	1000
							Sales invoice cost	20000
							Cost per invoice	20
							Cost per unit	0.26	0.88
							iv) Machine set up costs
							No of production batch	20	18
							Machine set up per batch	2	5
							Cost per batch	40	90
								26000/130
								200
							Cost per unit	200/750	200/1000
								0.26	0.20
							v) All other overheads
							Labours hours required per unit	2 hours	5 hours
							Annual sales volume (in units)	15000	18000
							Hours required	30000	90000
								120000
							Overheads cost	60000
							Cost per hour	60000/120000	60000/120000
								0.5	0.5
							Cost per unit	2*0.5	5*0.5
								1	2.5
Answer to B)
There is difference in cost per unit of feathers and claws product under traditional costing approach and activity based costing approach of:
For feathers is of .85 and for claws is of 3.42 per unit which leads to have impact on profit per unit also.
Which rise to 0.15 per unit for feathers and claws for rise to 3.42 per unit.