Mr Bunn operates a small family bakery, based in Coventry for over 50 years.
It has recently moved into new premises and has invested in more advanced equipment, with the aim of making the baking process more automated.
In the past, their overheads have been relatively small so they have used absorption costing to integrate the overheads into their product costs. They have been advised by their accountant to review this process and possibly adopt activity based costing, as this will provide more accurate product and sales price information. The business is reluctant to make too many changes but has agreed to trial one product, namely the sausage roll, to determine whether activity based costing is more effective.
The business currently absorbs its overheads on the basis of labour hours and the selling price is generated by doubling the production cost.
Current product information to produce a batch of 1000 sausage rolls:
The overheads for the whole bakery are £100,000 and the total labour hours are 20,000 hours.
The accountant has determined the following activities that cause overheads to occur.
Required:
a) Calculatethefullabsorptionproductioncostandsellingpriceforone sausage roll.
b) Calculate the full activity based production cost and selling price for one sausage roll.
c) Compare both methods of costing by identifying two advantages and two disadvantages for each.