Required: (i) Calculate the unit cost of each product ifthe conventional costing

Question

Required:

(i) Calculate the unit cost of each product ifthe conventional costing approach is used
(ii) Determine the unit cost of producing each product if activity based costing is used
(iii) ) Based on the answers in part (i) and (ii), discuss the differences in the product costs under the traditional and activity-based costing (ABC) approaches and make a recommendation as to whether ABC should be used.

(b) The Target Furniture Pty Ltd manufactures two types of chairs - Lounge and King. The company is currently using a traditional costing system with direct labour hours as the cost driver. The company is considering whether to use the activity-based costing (ABC) method to allocate overhead costs to products. Budgeted overhead costs of the upcoming accounting period follow: Activity Total budgeted Activity driver Material setups Material handling Assembly activity cost $350,000 $250,000 $600,000 Number of material setups Number of parts Number of labour hours The activity level for the year is King Number of parts Number of setups Total labour hours Units completed Direct material cost per unit Direct labour cost per unit Lounge 25,000 30 40,000 10,000 $50 $100 100,000 95 20,000 5,000 $100 $150

Explanation / Answer

Target Furniture Pty Ltd Overhead Costs: Particulars Lounge King Activity Total Budgeted Activity Cost Activity Driver Number of Parts 25000 100000 Material Setups 350000 No of Material Setups Number of Setups 30 95 Material Handling 250000 No of Parts Total Labor Hours 40000 20000 Assembly 600000 No of Labor Hours Units Completed 10000 5000 Total 1200000 DM Cost 50 100 Total Labor Hours 60000 DL Cost 100 150 Cost Per Labor Hour 20 Labor Hours PU 4 4 (Total LH/Units) 1 Unit Cost Under Conventional Method: Particulars Lounge King DM Cost 50 100 DL Cost 100 150 Allocated OH 80 80 Total Unit Cost 230 330 2 Unit Cost Using ABC: Particulars Lounge King Overhead Costs: DM Cost 50 100 Activity Total Budgeted Activity Cost Activity Driver Total Activity Rate per Activity DL Cost 100 150 Material Setups 350000 No of Material Setups 125 2,800.00 Allocated OH 53.4 133.2 Material Handling 250000 No of Parts 125000 2.00 Total Unit Cost 203.4 383.2 Assembly 600000 No of Labor Hours 60000 10.00 Total 1200000 Allocation on the basis of Activity: Particulars Lounge King Material Setups 84000 266000 Material Handling 50000 200000 Assembly 400000 200000 Total Allocation 534000 666000 Total Units 10000 5000 Per Unit Cost 53.4 133.2 3 For the given company, ABC costing is the best technique to identify unit cost because there are a lot of different activities and it is easier for the management to identify the different activity bases for each product. Also there are no such Common expenses/General OH/Unallocable expenses so, we have Activity factors for all the activities.

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