Question

Pastazara Co. Ltd is a multi- product firm that specializes in the production of raviolis, gnocchis and tagliatelles. Customers of ravioli and gnocchi are very sensitive to any price change whereas demand for tagliatelle is quite inelastic. The company buys a single type of raw material that is being used in the manufacture of all three products. The company has been using full absorption costing for many years and absorbs overheads on the basis of direct labour hours. To fix selling prices, the company applies a standard mark up on cost. Budgeted production and sales volumes for gnocchis, raviolis and tagliatelles for the forthcoming year 2022 are: Product Units Gnocchi 20,000 Raviolis 16,000 Tagliatelle 26,00

The budgeted direct costs of the three products are shown below: Direct Materials per unit: Rs Gnocchi 25 Ravioli 28 Tagliatelle 22 Direct Labour per unit at Rs12 per hour: Rs Gnocchi 30 Ravioli 30 Tagliatelle 24 Budgeted production overheads for the forthcoming year are analysed as follows: Cost Pool Rs Cost driver Machine set up costs 280,000 Number of batches Material ordering costs 316,000 Number of purchase orders Machine running costs 420,000 Number of machine hours General facility costs 361,200 Number of machines hours Quality inspection 42,800 Number of tests TOTAL 1,420,000 The following additional data relate to each product: Product Gnocchi Ravioli Tagliatelle Batch size (units) 500 800 400 No. of purchase orders 35 50 40 Machine hours per unit 1.5 1.75 1 The company carries out 4 tests on each production batch. In order to increase profitability, Pastazara Co. ltd wants to boost sales revenue but its capacity to do this is limited because of its use of cost plus pricing and the application of the standard mark-up. The finance director has suggested using activity based costing (ABC) instead of full absorption costing, since this will alter the cost of the products and may therefore enable a different price to be charged.

Required: (a) Calculate the budgeted full production cost per unit of each product and total production cost using the company’s current method of absorption costing.

Calculate the budgeted full production cost per unit and total production cost of each product using activity based costing

Calculate the budgeted full production cost per unit and total production cost of each product using activity based costing