MIDLANDS STATE UNIVERSITY

ACC408 CASES ON ACTIVITY BASED COSTING

1.The following product cost data was extracted from the books of Bingo ltd:
A B C D
Output (Units) 120 100 80 120
Unit cost-Direct materials 40 50 30 60
-Direct labour 28 21 14 21
Machine hours 4 3 2 3

Units produced are similar and produced in production runs of 20 units and sold in batches of 10
units.
The production overheads are currently absorbed on the machine hour rate.
The overheads have been analysed as follows:
Machine departmental costs (rent, rates, depreciation, supervision) $10 430
Set up costs 5 250
Stores receiving 3 600
Inspection/Quality control 2 100
Materials handling & despatch 4 620

You have ascertained the cost drivers for the overheads as follows:
Costs Cost driver
Set up costs Number of production runs
Stores receiving Number of requisitions raised
Inspection/Quality control Number of production runs
Materials handling & despatch Number of orders executed

The number of requisitions raised was 20 for each product and the number of orders executed
was 42, each order being for a batch of 10 for a product.
Required
a) Calculate the product cost based on the machine hour basis.
b) Calculate the product cost applying the ABCosting approach.
c)Analyze the difference in product cost. Comment briefly on the findings pointing towards the
effect these results could have on pricing and profit.
2. Emm ltd manufactures 3 products through two departments-A & B. The firm also has 3
service departments-Receiving, Packing & Maintenance. Overhead costs for the 3 service
departments are:
 A B Receiving Packing Maintenance
$380 000 $450 000 $210 000 $190 000 $420 000

Production department A is labour intensive whilst B is capital intensive. Overheads are

traditionally recovered in Dept A on a labour hour basis and Dept B on a machine hour basis.
Overheads are allocated to production departments on the basis of estimated usage as follows:
Department A Department B
Receiving 40% 60%
Packing 55% 45%
Maintenance 30% 70%

Details of product usage time and related inputs are as follows:

Product Annual output Labour hours Machine hours
X 5 000 10 000 20 000
Y 20 000 40 000 60 000
Z 40 000 80 000 160 000

Emm ltd.’s management is interested in analyzing the overhead cost per unit manufactured on
the ABC basis and has extracted the following:
Department A Department B
Labour related $130 000 -
Machine related - $120 000
Set up related $80 000 $270 000
Inspection related $170 000 $60 000

Cost driver Product X Product Y Product Z

Set ups 20 60 10
Number of inspections 90 90 120
Maintenance hours 1 000 2 000 3 000
Number of raw material orders 40 80 80
Number of external orders 120 80 20

Required
a)Calculate the unit cost for each product under (i) traditional method (ii) ABCosting.
b)State the preferred method and justify your reasoning.