Weld plc manufactures mantel clocks:
Assessment criteria:
(i) Calculatefull cost and selling price using Absorption and ABC costing system
(ii) Analysis of full cost and selling price using both costing systems
(iii) Discussion of advantages and disadvantages of both costing systems
For parts 1 & 2, I expect you to use academic references so please ensure you use the Coventry Harvard referencing system.
Question: Weld plc manufactures mantel clocks. The company makes three different models, A, B, and C. Product costs are computed on an overhead absorption-rate basis using a labour-hour method. Prices are set based on costs plus 20 per cent.
The planned figures for next year are as follows:
A B C
Material cost (£/unit) 25 62.5 105
Direct labour hours (per unit) 0.5 1 1
Planned production/sales (units) 20,000 1,000 10,000
Next year’s overheads are planned to be £4,410,000. Direct labour is £8/hour.
The company has reduced the selling price of model A, with the result of a very low profit margin. The company’s finance department has therefore proposed to implement an activity-based costing approach. An analysis of the overheads led to a grouping of the main business activities into machining (£2,780,000), logistics (£590,000), and establishment (£1,040,000) costs. These activities can be allocated to the respective cost drivers of machine hours, material orders and space. This reflects the use of resources in each area. Further investigation showed the proportion of each
model (A, B, and C) of the total volume of products:
A B C
% % %
Machine hours 40 15 45
Material orders 47 6 47
Space 42 18 40
Required:
1. Calculate for each product the full cost and selling price using:
i) The absorption costing method
ii) The activity-based costing method
2. Comment on the differences in cost and selling price between the absorption method and the activity-based cost method
3. Prepare a report to the board of Weld Plc, explaining the benefits and the shortcomings of the activity-based costing method and Absorption costing method, and based on your analysis in part (1), provide them with your opinion on which type of costing should be adopted.