QUESTION 1

Rally Limited manufactures 4 products A , B, C and D, the direct labour cost per
hour of which is £5.
Other output and cost data are as follows:

PRODUCT OUTPUTS NUMBER OF MATERIAL DIRECT MACHINE

IN UNITS PRODUCTION COST PER LABOUR HOURS
RUN IN THE UNIT PER UNIT PER UNIT
PERIOD
A 10 2 20 1 1
B 10 2 80 3 3
C 100 2 20 1 1
D 100 2 80 3 3

Other Overheads include the following:

Short-run variable costs - 3,080
Expediting and scheduling costs - 9,100
Set-up costs - 10,920
Materials handling costs - 7,700
You are required to prepare the unit cost for each product using.
a. Absorption Costing Method, and
b. Activity Based Costing (ABC) Method.
SOLUTION 1:

a. Absorption costing approach using either direct labor or machine hours:

DETAILS A B C D TOTAL
£ £ £ £ £
Direct Materials 200 800 2,000 8,000
Direct Labour 50 150 500 1,500
Overheads (Notes) 700 2,100 7,000 21,000
TOTAL COSTS 950 3,050 9,500 30,500 44,000
UNITS PRODUCED 10 10 100 100
COST PER UNIT £95 £305 £95 £305

NOTE 1: Overheads is derived viz : Total Overheads/Total No of Hours worked.

= £(3,080+9,100+10,920+7,700)/440 Hours.
= £30,800/440 hrs = £70 per Direct Labour/Machine Hours worked.

NOTE 2: Total No of Hours worked is derived viz:

PRODUCTS UNITS MULTIPLY BY MACHINE TOTAL NO OF
PRODUCED HOURS HOURS
A 10 X 1 10
B 10 X 3 30
C 100 X 1 100
D 100 X 3 300
440
b. Activity Based Costing Method:

Details A B C D TOTAL
£ £ £ £
Direct Materials 200 800 2000 8,000
Direct Labour 50 150 500 1,500
Short run Variable 70 210 700 2100
Overhead (W.1)
Set Up Cost (W.2) 1,560 1,560 3,900 3,900
Expediting & 1,300 1,300 3,250 3,250
Schedule Costs
(W.3)
Materials Handling 1,100 1,100 2,750 2,750
Cost (W.4)
TOTAL COST 4,280 5120 13,100 21,500
Units Produced 10 10 100 100
Cost Per Unit 428 512 131 215

WORKINGS:
Note that in ABC method, costs are allocated to products individually by
source of such cost. (i.e. Cost Drivers).

1. Short Run Variable Cost = 3080/ 440 hrs = £7 per machine Hr.
= Units Produced X Machine Hrs X Cost per Machine Hrs
Product Unit Machine Cost Per Total (£)
Produced Hours Machine
Hour (£)
A 10 1 7 70
B 10 3 7 210
C 100 1 7 700
 D 100 3 7 2,100

2. Set Up Cost = £10,920 / 14 Production Runs = £780 per run

= Set up cost X Production run
Product Production Run Set up cost Total (£)
per run (£)
A 2 780 1,560
B 2 780 1,560
C 5 780 3,900
D 5 780 3,900

3. Expediting & Scheduling Costs (E&SC)= 9,100 / 14 Production runs =

£650 per run.
= E&SC X Production run
Product Production Run E & S Cost (£) Total (£)
A 2 650 1,300
B 2 650 1,300
C 5 650 3,250
D 5 650 3,250

4. Materials Handling Cost = £7,700 / 14 Production runs = £550 per run

= MHC X Total Production run
Product Production run M. H Cost (£) Total (£)
A 2 550 1,100
B 2 550 1,100
C 5 550 2,750
D 5 550 2,750