University of Kent Predetermined Overhead Allocation Rate Questions

Question 2 (answer all parts of the question)
Tiger Ltd. manufactures three different products and the table below shows the forecasts
for the coming financial year:
Product A Product B Product C
Volume of production (units) 20,000 10,000 30,000
Direct labour (hours) 2,000 1,000 3,000
Direct materials (Kgs) 250,000 150,000 400,000
Direct labour and material costs £40,000 £40,000 £45,000
Machine hours 15,000 5,000 10,000
Production runs 65 190 135
The company has also made the following forecasts in relation to its manufacturing
overheads:
Activity Amount Cost driver Level
Servicing/maintenance £139,000 Machine hours 30,000
Production scheduling £130,000 Production runs 390
Materials handling £320,000 Quantity of material (Kgs) 800,000
Total £589,000
Required:
i. Compute unit product costs for all three products using traditional absorption
costing in which overheads are recovered (use direct labour hours as the basis
for the recovery of overheads). (35 marks)
ii. Calculate unit product costs for all three products using activity based approach
(35 marks)
iii. Comment on the quality of the management information provided by ABC in
relation to costing, pricing and control.
(Maximum 250 words) (30 marks)