Page 32 - P1 Integrated Workbook STUDENT 2018
P. 32
Chapter 2
Example 1
A manufacturing business makes a product in two models, model M1
and model M2.
Details of the two products are as follows.
Model M1 Model M2
Annual sales 8,000 units 8,000 units
Number of sales orders 60 250
Sales price per unit $54 $73
Direct material cost per unit $11 $21
Direct labour hours per unit 2.0 hours 2.5 hours
Direct labour rate per hour $8 $8
Special parts per unit 2 8
Production batch size 2,000 units 100 units
Setups per batch 1 3
Total overheads for the production of both models have been analysed as
follows:
$ Cost driver
Setup costs 97,600 Number of setups
Material handling costs 42,000 Number of batches
Special part handling costs 50,000 Number of special parts
Invoicing 31,000 Number of sales orders
Other overheads 108,000 Direct labour hours
–––––––
Total overheads 328,600
–––––––
The manufacturer traditionally uses absorption costing but is now considering
a switch to activity based costing.
Determine the activity based cost of the Model M1 product and compare
this with the absorption cost of the product.
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