ACTIVITY BASED COSTING

Question 1
Star Sdn Bhd manufactures two products, Product B and Product H. Product H is of fairly recent
origin, having been developed as an attempt to enter a market closely related to that of Product
B. Product H is the more complex of the two products, requiring two hours of direct labour per
unit to manufacture compared to one hour of direct labour for Product B. Product H is produced
on an automated production line.
Overhead is currently assigned to the products on the basis of direct labour-hours. The company
estimated it would incur RM450,000 in manufacturing overhead costs and produce 7,500 units
of Product H and 30,000 units of Product B during the current year. Unit costs for materials and
direct labour are:
Product B
RM
12
10

Direct materials
Direct labour

Product H
RM
25
20

Required :
(a)

Compute the predetermined overhead rate under the current method of allocation and
determine the unit product cost of each product for the current year.
(10 marks)

(b)

The company's overhead costs can be attributed to four major activities. These activities
and the amount of overhead cost attributable to each for the current year are given below:

Activity Cost Pools

Estimated
Overhead Costs RM

Machine setups required

Expected Activity
Product B
600

Product H
1,200

Total
1,800

500

100
10,200

600
17,000

900

1,600

180,000
Purchase orders issued
Machine-hours required

48,000
102,000

6,800
Maintenance requests issued

120,000
450,000

700

Using the data above and an activity-based costing approach, determine the unit product cost of
each product for the current year.

ACTIVITY BASED COSTING

Question 2
The Lock Shop makes three 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

Product A
Product B
Product C

Labour
hours

1
1

Machine
hours
1
1
3

Materials
per unit
RM

Volume

20
12
25

750
1,250
7,000

Units

Direct labour costs RM6 per hour and production overheads are absorbed on a machine hour
basis. The rate for the period is RM28 per machine hour.
(a)

You are required to calculate the cost per unit for each product using the conventional
method.
(5 marks)

Further analysis shows that the total of production overheads can be divided as follows:
%
Costs relating to set-ups
35
Costs relating to machinery
20
Costs relating to materials handling
15
Costs relating to inspection
30
Total production overhead
100
The following total activity volumes are associated with the product line for the period as a
whole.
Numbers of
Number of
Numbers of
Set-ups
movements of
inspections
materials
Product A
75
12
150
Product B
115
21
180

ACTIVITY BASED COSTING

(b)

480
670

87
120

670
1,000

You are required to calculate the cost per unit for each product using ABC principles
(15 marks)

Question 3
Sanjay Rao owns a small precision engineering factory which makes 2 specialist products,
altimeters and Barometers. Set out below are the budgeted cost and operating data for both
products.
Altimeters
Barometers
Selling price per unit
Variable cost per unit
Machine hours per unit
Output per week (units)

$19
$7.50
5
120

$15
$6
2
200

Weekly overhead costs are:

Activity
Setting up machines
Storing and issuing materials
Maintaining machines

Cost Driver
Number of batches
Materials requisitions
Machine hours

Cost Pool
$800
$620
$1,000
$2,420

Altimeters and Barometers are produced in batches of 40 units at a time. Altimeters are
made from 4 separate items and so 4 materials requisitions are needed for each batch
manufactured. Barometers are made from 10 different items so 10 materials requisitions
are needed per batch.
REQUIRED:
Calculate the following:
(a) The cost and profit per unit for each product using absorption costing. Absorb
overheads using machine hours as your basis.
(b) The cost and profits per unit for each product using ABC.

ACTIVITY BASED COSTING

(c) The profit per week for each product using activity based costing (ABC)

Question 4
Helen Xemenides manages a company which specialises in producing different types of
aircraft components. The components are made by moulding Kevlar, an extremely strong
material. Components are produced in small batches. Each batch must be inspected to
check that the components are of the correct quality.
The company has been invited to carry out 2 fixed price contracts for 2 different aircraft
manufacturers. The company has sufficient capacity for both contracts but Helen is
uncertain whether they will be profitable.

Set out below are the key data concerning each contract:

Customer
Component type
Contract value (selling price)
Contract quantity
Material cost per unit
Molding time per batch
Batch size

Brang Aircraft
Inc
A98
$27,000
1,000 units
$15
5 hours
100 units

Yantaero SA
B99
$100,000
2,000
$20
7.5 hours
50 units

Budgeted overheads for the year are:

Cost driver
Molding hours
Batches
Contracts

Cost driver
volume pa
2,000
150
20

Cost pool
$150,000
$75,000
$125,000

REQUIRED:
(a) Calculate the activity based costs and profit for each contract
(b) Calculate the profit for each job using absorption costing. Absorb overheads using
molding hours.

ACTIVITY BASED COSTING

Question 5
Cantail makes 7 standard products from stainless steel and brass. Budgeted overhead costs for
the next year are:
Activity
Purchasing
Setting
Materials handling
Inspection
Machining costs

Cost driver
Purchase orders
Batches produced
Materials movements
Batches produced
Machine hours

Cost driver volume pa

Cost pool

1,500
2,800
8,000
2,800
50,000

$75,000
$112,000
$96,000
$70,000
$150,000

Cantails most popular product is stainless steel cleats for large ocean-going yachts.
The next years budget details for stainless steel cleats are:
Purchase orders
Output
Production batch size
Materials movements per batch
Machine hours per unit

25
15,000 units
100 unit
6
0.1

REQUIRED:
(a) Calculate the budgeted overhead costs for stainless steel cleat production during the
next year using activity based costing principles.
(b) Calculate the budgeted overhead costs for stainless steel cleat production using
absorption costing (absorb overhead using machine hours)

ACTIVITY BASED COSTING