Question

Bonne Nuit Ltd manufacture and sell top quality beds and mattresses. In the mattresses department, Bonne Nuit make pocket sprung, foam and latex mattresses. In the past, they have used absorption costing system to allocate overhead costs to their products, with labour hours as the allocation base. The following information relates to the production and sale of the three mattresses.

	Pocket sprung	Foam	Latex
Selling price per unit	£1,000	£750	£2,150
Direct material cost per unit	£238.50	£156	£219.60
Direct labour cost per unit	£90	£60	£150
Direct labour hours to make one unit	8	6	10
Annual production (units)	1,440	2,296	1,400
Number of set ups per annum	180	60	60
Number of purchase orders per annum	200	320	80

Production overhead costs consist of:

Output related overheads £1,350,000

Quality control                            £1,100,000

Machine set up overheads £1,346,396

Procurement costs   £172,500

Total £3,968,896

Bonne Nuit have found that their competitors use another method, activity-based costing system, to allocate their overhead costs. They want to see if there is a difference in the costing of their products when activity-based costing is used.

Using activity-based costing system, how much, in total, of machine set up overheads should be charged to the production of all pocket sprung mattresses (to the nearest whole number)?

Answer 1

Answer

• Requirement asked: Production Overhead cost allocated to one “Foam Mattress” using Absorption Costing system.

• Total Production overhead cost = £ 3,968,896

• Total labor hours = (1440 units x 8 LHs) + (2296 units x 6 LHs) + (1400 units x 10 LHs)
  = 11520 + 13776 + 14000
  = 39,296 labor hours

• Overhead absorption cost per labor hours
  = £ 3968896 / 39296 LHs
  = £ 101 per Labor hour

• Number of labor hours used in the production of “one foam mattress” = 10 DLHs

• Production Overhead cost allocated to one foam mattress
  = 10 DLHs x £ 101
  = £ 1010 [Answer]