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1. A company is changing its costing system from traditional absorption based on labour hours to Activity Based Costing. It has overheads of $156,000 which is related to taking material deliveries.
The delivery information about each product is below.
-X: Total units required 1,000
Delivery size 200-Y:Total units required 2000
Delivery size 400
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Z: Total units required 3000
Delivery size 1000Total labour costs are $360,000 for 45000 hrs. Each unit of each product takes the same number of direct hours.
Assuming that the company uses the number of deliveries as its cost driver, what is the increase or decrease in units for Z arising from the change from Absorption costing to ABC?
The answer is: Decrease from $14 per units
-I have having some difficulty to tackle this question. Could you please help me?
Thanks.
Have you watched my free lectures on Activity Based Costing?
The number of deliveries for X is 1,000/200 = 5
For Y it is 2,000 / 400 = 5
For Z it is 3,000/1,000 = 3So a total of 13 deliveries.
You should have no problem with the tradition absorption costing – since they all take the same number of hours per unit, you can absorb on the basis of unit when splitting the total between the three products.
Using ABC, you will split based on the number of deliveries, so 3/13 of the total will go to product Z.
Thank you for the explanation.
I do have obtained the correct figure for ABC($12), however for the traditional one,I am still having some difficulties. I am unable to obtain the right figure for the traditional costing .Could you please help?Thanks.
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