Page 5 - ABC Notes

Activity Based Costing

Question 2 – Gamble Ltd

Gamble Ltd has noted a number of market fluctuations in relation to sales of two
specific products – Amber and Venus. They are concerned that their products are
appropriately costed and priced.

The company uses a cost mark up pricing policy and uses a pre-determined overhead
absorption rate based on direct labour hours. The rate is calculated at the start of the
year based on the following information:-

Production overhead 1,200,000
Direct labour hours 50,000
Machine hours 100,000
Set up hours 1,000

You have carried out preliminary investigations and have identified the following
additional product information:-
Amber Venus
Direct materials €250 €350
Direct labour hours 10 20
Machine hours 80 25
Set up hours 1 2
Mark up 50% 40%
Direct labour rate €15 €15

Further analysis of production overheads and supporting information reveals the
following:-

Set up Maintenance Cutting Assembly
€ € € €
50,000 50,000 100,000 100,000
0 0 160,000 180,000
50,000 50,000 120,000 120,000
0 25,000 145,000 50,000

You have been asked to analyse the information and make relevant calculations using
traditional and modern costing methods, to inform decisions on pricing.

Requirement:

(a) Calculate the predetermined overhead absorption rate used by Gamble Ltd at the
start of the year.

(b) Calculate the standard cost and the sales price of Amber and Venus, using the
predetermined overhead absorption rate.

(c) Identify suitable alternate cost pools and cost drivers for Gamble Ltd.

(d) Calculate an activity based overhead absorption rate.

(e) Calculate the cost and the sales price of Amber and Venus using the activity based
overhead absorption rate.

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