Hi there, I have a question that I don\'t know how to work it out. If anyone can

Question

Hi there,

I have a question that I don't know how to work it out. If anyone can help it would be very much appreciated. Thanks!

KL Ltd. operates an activity-based costing system and has forecasted the following information for overhead activities next year.

The company’s general fixed overheads such as lighting and heating, which cannot be linked to any specific activity, are expected to be $900,000, and these overheads are absorbed on a direct labour hour basis. Total direct labour hours for next year are expected to be 300,000 hours.

KL Ltd. expects orders for its one of products, Product ZT3 next year to be in two slots: i) 100 orders of 60 units per order and, ii) 60 orders of 50 units per order. The company holds no stocks of product ZT3 and will need to produce the order requirements in production runs of 900 units per production run. KL Ltd.’s practice is to place one order for components used by product ZT3 prior to each production run. Four test runs are undertaken during each production run to ensure that quality standards are maintained. The following additional cost and profit information relates to product ZT3.

Direct material cost: $1 per unit

Direct labour: 10 minutes per unit at $7.8 per hour

Profit mark up: 40% of unit cost

i) Calculate the activity-based cost/activity driver rate for each cost pool.

ii) Calculate the cost per unit and selling price per unit of Product ZT3.

iii) Discuss whether the use of cost drivers in a traditional accounting system differs from those in an activity-based costing system.

Cost Pool Total Costs Cost driver Number of drivers Production set-ups $105,000 Set-ups 300 Product testing $300,000 Tests 1,500 Component supply and storage $25,000 Component orders 500 Customer orders and delivery $112,500 Customer orders 1,000

Explanation / Answer

i) The Activity-based cost/ Activity driver rate:

ii) Cost per unit =

Direct material cost = $1.00

Direct labor cost =$1.30

Overhead cost =$3.215

Total cost per unit = $5.515

profit mark up = $2.206

Selling Price per unit = $7.72

iii) The cost per unit in a traditional accounting system = 900000 / 300000 hrs. = $3 per unit but as per activity-based costing system the cost per unit comes out $3.215. In traditional accounting the cost driver of all the Overheads is only one, mainly the Direct Labor Hours whereas under activity-based costing system, the overhead is allocated as per the concerned cost driver of the specific overhead.  In traditional accounting the cost driver is the general allocation rate whereas activity-based cost driver is more related cost allocation.

Cost Pool Total Costs Cost driver Number of drivers The Activity-based cost/ Activity driver rate overhead cost per unit Production set-ups $105,000 Set-ups 300 105000/300 = $350 per set-up 350/900 = 0.39/unit Product testing $300,000 Tests 1,500 300000/1500 = $200 per test 200*4/900 = 0.89 / unit Component supply and storage $25,000 Component orders 500 25000/500 = $50 component order 50/900 = 0.06 / unit Customer orders and delivery $112,500 Customer orders 1,000 112500/1000 = $112.50 per customer order 112.50/60 = 1.875 / unit
Overhead cost = $3.215 / unit

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