8.

25 Trimake Ltd Case Study

Briefing a)

Trimake makes 3 main products, using broadly the same production

methods and equipment for each. A conventional product costing system
is used at present, although an activity-based costing (ABC) system is being considered.
Details of the three products for a typical period are:
Hours per unit
Material Volumes
Lab'r hrs Machine unit per unit Units
(£)
Product X 1/2 1 1/2 20 750
Product Y 1 1/2 1 12 1250
Product Z 1 3 25 7000

Direct labour costs £6 per hour and production overheads are absorbed on a
machine hour basis. The rate for the period is £28 per m/c hour.

a) You are required to calculate the cost per unit for each product using conventional methods.

Further analysis shows that the total of production overheads can be divided as follows:

Costs relating to set-ups 35.00%

Costs relating to machinery 20.00%
Costs relating to materials handling 15.00%
Costs realting to inspection 30.00%
Total production overhead 100.00%

The following activity volumes are associated with the product line for the period as a whole.

Total activities for the period:

N'br of Nb'r of Number

set-ups movements of inspections
of materials
Product X 75 12 150
Product Y 115 21 180
Product Z 480 87 670
670 120 1000

You are required

b) to calculate the cost per unit for each product using ABC principles;

c) to comment on the reasons for any differences in the costs in your answers to a) and b).
8.25 Trimake Ltd Case Study

Solution a) production cost per unit (conventional method)

Product X Product Y Product Z

(£) (£) (£)
Direct labour at £6 per hour 3 9 6
Direct materials 20 12 25
Production overhead at £28 per m/c hour 42 (11/2hrs) 28 (1 hr) 84 (3 hrs)

65 49 115
8.25 Trimake Ltd Case Study

Solution b)
the total production overhead is derived from the overheads allocated to the product in part a):

(£)
Product X 31 500 (750 X £42)
Product Y 35 000 (1250 X £28)
Product Z 588 000 (7000 X £84)
Total Production Overhead 654 500

Overhead costs traced to cost pools:

Set-up cost 229 075 35.00%

Machining 130 900 20.00%
Materials handling 98 175 15.00%
Inspection 196 350 30.00%
654 500

Costs driver rates:

(£)
Cost set-up cost 341.903 (£229075/670)
Cost per machine hour 5.600 (£130900/23375*)
Cost per material movement 818.125 (£98175/120)
Cost per inspection 196.350 (£196350/1000)

Note:
*Machine hours = (750x 11/2) +(1250 X 1) + (7000 X 3) = 23375 (Volume of units x m/c hrs per unit)

Overhead cost assigned to each product:

Product X Product Y Product Z
(£) (£) (£)
Set-up cost at £341.903 25 643 (75) 39 319(115) 164 113(480)
Machining at £5.60 per machine hour 6 300(1125) 7 000(1250) 117 600(21000)
Materials handling at £818.125 per movement 9 817(12) 17 181(21) 71 177(87)
Inspection at £196.35 per inspection 29 453(150) 35 343(180) 131 554(670)
71 213 98 843 484 444

Number of units 750 1250 7000

Overheads cost per unit £95 £79 £69