b) TABLE 2 shows the cost drivers, the quantity and unit cost of the
cost driver, and total activity cost.
For two products A and B it is found that:
• The direct labour hours for products A and B are the same.
• It takes approximately four times as many machining hours in
both cost centres to produce product B as product A.
• Product A requires one quarter of the materials purchased for B.
• Product A requires one third of the total Delivery
notes/invoices.
• Product A has issued one third of the total materials issued per
production run.
• Product A has issued one half of the planning per production
run of that required by Product B.
• Product B requires twice as many machine set-ups as product A.
• The products have the same number of quality control inspections.
If the company produces 50 000 each of products A and B:
(i) Complete TABLE 2 to determine the cost driver unit costings in
column 5 for the activities of column 1. Show also the product
quantity splits in column 4 of each activity for product A and B
(e.g. quantity of cost driver Activity Centre 1 is shown as split
100 000 product A and 400 000 product B).
(ii) Determine the overhead activity cost allocations to products A
and B (using the activity proportions calculated in column 4) by
completing TABLE 3.
(iii) Determine the total overhead allocations to products A and B.
(iv) Find the per unit product overhead cost allocations for each
product.
|
Activity involved |
Allocated Cost |
Activity Cost |
Quantity of Cost |
Cost Driver |
|
to Produce Product |
of Activity |
Driver |
Drivers |
Unit cost/rate |
|
|
£ |
|
|
per Cost |
|
|
|
|
|
Driver £ |
|
|
|
|
|
|
|
Activity Centre 1 |
750 000 |
Machine Use |
500 000 |
|
|
Machining |
|
hours |
(100 000 prod A |
|
|
|
|
|
400 000 prod B) |
|
|
|
|
|
|
|
|
Activity Centre 2 |
500 000 |
Machine Use |
250 000 |
|
|
Machining |
|
hours |
|
|
|
|
|
|
|
|
|
Product Assembly |
400 000 |
Direct labour hours |
100 000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials |
|
|
|
|
|
Procurement |
|
|
|
|
|
Activities |
|
|
|
|
|
|
|
|
|
|
|
Product Materials |
600 000 |
Purchase Orders |
5000 |
|
|
Purchase |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Material |
240 000 |
Number of Invoices |
3000 |
|
|
Reception/Storage |
|
|||
|
|
or Material Delivery |
|
|
|
|
|
|
|
|
|
|
|
|
Notes |
|
|
|
|
|
|
|
|
|
Materials |
225 000 |
Number of |
1500 |
|
|
Issued/Production Run |
|
|||
|
|
Production runs |
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
Support Activities |
|
|
|
|
|
|
|
|
|
|
|
Production Run Planning |
150 000 |
Number of |
1500 |
|
|
|
|
Production runs |
|
|
|
|
|
|
|
|
|
Machine Setting |
30 000 |
Setting up/tooling |
750 |
|
|
Up/Tooling |
|
labour hours |
|
|
|
|
|
|
|
|
|
Statistical Quality |
10 000 |
Sample |
400 |
|
|
Control |
|
inspection and |
|
|
|
|
|
Test Cost |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
Activity |
Product A |
Product B |
||||
|
|
|
£ |
|
£ |
||
|
|
|
|
|
|
|
|
|
Activity Centre 1 |
1.5 × 100 000 |
|
150 000 |
1.5 × 400 000 |
|
600 000 |
|
Machining |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity Centre 2 |
|
|
|
|
|
|
|
Machining |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Product Assembly |
|
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Materials |
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|
Procurement |
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|
Activities |
|
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Product Materials |
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Purchase |
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Product Material |
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Reception/Storage |
|
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|
Materials |
|
|
|
|
|
|
|
Issued/Production Run |
|
|
|
|
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|
|
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|
|
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Support Activities |
|
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|
|
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|
|
|
|
|
|
|
Production Run Planning |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Machine Setting |
|
|
|
|
|
|
|
Up/Tooling |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Statistical Quality |
|
|
|
|
|
|
|
Control |
|
|
|
|
|
|
|
|
|
|
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|
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Total |
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