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A COMPANY IS CHANGING ITS COSTING SYSTEM FORT TRADITIONAL ABSOPTION COSTING BASED ON LABOUR HOURS TO ABC. It has overheads of $156000 which are related to taking materials deliveries.
the delivery information about each product is bellow.
products x y z
total unit required 1000 2000 3000
delivery size 200 400 1000the labour cost are $ 360000 for 45000 hours. 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, is there an increase or decrease in unit costs arisen from the change from Absorption costing to Abc.
I don’t understand this exercise,thanks
You need to calculate the overhead cost per unit using traditional absorption costing and compare with the overhead cost per unit using ABC.
For traditional costing, the overheads are charged to each product at the rate of $156,000/45,000 per hour. Since each unit takes the same number of hours, the hours per unit = 45,000/6,000 = 7.5hours.
Therefore the overhead cost per unit (for all products) is 7.5 x 156,000/45,000 = $26.With ABC, the number of deliveries for each product are X: 5 (1,000/200); Y: 5 (2,000/400); Z: 3 (3,000/1,000). So in total, there are 13 deliveries.
So the overhead cost per delivery is $156,000/13 = $12,000.
So the total overhead charged to product X is 5 x $12,000 = $60,000 and therefore the overhead cost per unit for X is $60,000/1,000 = $6 per unit. (Similar workings for products Y and Z).I suggest that you watch my free lectures on this. The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
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