Assignment Question: The following budgeted information relates to ABC Ltd for the forthcoming period:
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|
Product X
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Product Y
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Product Z
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Sales and production (units)
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50,000 units
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40,000 units
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30,000 units
|
|
Selling price (per unit)
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$45
|
$95
|
$73
|
|
Prime cost (per unit)
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$32
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$84
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$65
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|
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Hours
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Hours
|
Hours
|
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Machine department (machine hours per unit)
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2
|
5
|
4
|
|
Assembly department (direct labour hours per unit)
|
7
|
3
|
2
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Overheads allocated and apportioned to production departments (including service cost centre costs) were to be recovered in product costs as follows:
1. Machine department at $3.50 per machine hour,
2. Assembly department at $1.20 per direct labour hour.
The management ascertains that the above overheads could be reanalysed into 'cost pools' as follows:
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Cost pool
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Cost driver
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Quantity for the period
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Machining services
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$357,000
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Machine hours
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420,000
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|
Assembly services
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$318,000
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Direct labour hours
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530,000
|
|
Set-up costs
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$30,000
|
Set-ups
|
530
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|
Order processing
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$156,000
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Customer orders
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32,000
|
|
Purchasing
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$84,000
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Supplier orders
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11,200
|
|
Total
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$945,000
|
|
|
The management has also provided you with the following estimates for the period:
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Product X
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Product Y
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Product Z
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|
Number of set-ups
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120
|
200
|
210
|
|
Customer orders
|
8,000
|
8,000
|
16,000
|
|
Suppliers' orders
|
3,000
|
4,000
|
4,200
|
Requirements: You are to provide a report of not more than 1,500 words (on written part only excluding numerical information) that includes the income statements using both conventional absorption costing and activity-based costing and comment on why certain costing method is considered to present a fairer valuation of the product cost per unit.