Traditional Volume-Based Product Costing
Q. A. 1. - Calculate the Unit Costs for Product A and B using the traditional volume-based product costing system.
The Overhead costs of Duo plc have been allocated using the Traditional costing system in table 1. The Overhead costs have been allocated using Direct Labour Hours (DLH) of production (Direct Labour Hour absorption approach). That is, Total Overhead costs were divided by the addition of all DLHs, giving us the overhead rate per labour hour (£10.345). This method was used since, firstly, it is the basic method of traditional volume-based costing, and secondly, we are not told how to apportion reciprocal services to the two departments; therefore since we can not apportion the costs between the two departments, we must apportion the total cost as a whole. This should not affect the end result, since the total cost to be allocated would of course be the same in both cases.
Then the DLHs for Part A were added (500000 hrs for the machine department and 150000 hrs for the fitting department), and multiplied by the overhead rate per labour hour, in order to find the overhead cost to be allocated to that department (£6724146). This result was finally divided by the units produced to give us the overhead cost per unit (£22.41).
The same procedure was done for Part B. The DLHs were added (600000 hrs for the machine department and 200000 hrs for the fitting department), and multiplied by the overhead rate per labour hour, in order to find the overhead cost to be allocated to that department (£8275872). This result was finally divided by the units produced to give us the overhead cost per unit (£27.59).
Q. A. 2. Using ABC calculate the unit costs for A and B.
The Overhead costs of Duo plc were now allocated using the Activity Based Costing (ABC) system, as seen in tables 2, 3 & 4.
In table 2 the apportionment basis (cost drivers) for each overhead cost, and the proportion of the cost to go to each part of production was stated.
In table 3 the
The Overhead costs of Duo plc have been allocated using the Traditional costing system in table 1. The Overhead costs have been allocated using Direct Labour Hours (DLH) of production (Direct Labour Hour absorption approach). That is, Total Overhead costs were divided by the addition of all DLHs, giving us the overhead rate per labour hour (£10.345). This method was used since, firstly, it is the basic method of traditional volume-based costing, and secondly, we are not told how to apportion reciprocal services to the two departments; therefore since we can not apportion the costs between the two departments, we must apportion the total cost as a whole. This should not affect the end result, since the total cost to be allocated would of course be the same in both cases.
Then the DLHs for Part A were added (500000 hrs for the machine department and 150000 hrs for the fitting department), and multiplied by the overhead rate per labour hour, in order to find the overhead cost to be allocated to that department (£6724146). This result was finally divided by the units produced to give us the overhead cost per unit (£22.41).
The same procedure was done for Part B. The DLHs were added (600000 hrs for the machine department and 200000 hrs for the fitting department), and multiplied by the overhead rate per labour hour, in order to find the overhead cost to be allocated to that department (£8275872). This result was finally divided by the units produced to give us the overhead cost per unit (£27.59).
Q. A. 2. Using ABC calculate the unit costs for A and B.
The Overhead costs of Duo plc were now allocated using the Activity Based Costing (ABC) system, as seen in tables 2, 3 & 4.
In table 2 the apportionment basis (cost drivers) for each overhead cost, and the proportion of the cost to go to each part of production was stated.
In table 3 the
Bibliography: 1. Storey Roger, Introduction to Cost & Management Accounting, Macmillan Press Ltd, London, 1995 2. Colin Drury, Management and Cost Accounting, 4rth edition, International Thompson Business press, 1996 3. Russell David, An Introduction to ABC, ACCA Newsletter, May 1995 4. David Stephenson, ACTIVITY-BASED COSTING, Internet, 1997, http://www.stephensonstrategies.com/tips/management_tips/activity-based_costing.html 5. ACTIVITY BASED COSTING (ABC) and ACTIVITY BASED MANAGEMENT (ABM), Internet, http://www.acq-ref.navy.mil/abc2.html ----------------------- [1] Storey Roger, Introduction to Cost & Management Accounting, Macmillan Press Ltd, London 1995, Page 64. [2] Storey Roger, Introduction to Cost & Management Accounting, Macmillan Press Ltd, London 1995, Page 178.