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40 A company is changing its costing system from traditional absorption costing based on
labour hours to activity-based costing. It has overheads of $156,000 which are related to
taking material deliveries.
The delivery information about each product is below.
Product: X Y Z
Total units required 1,000 2,000 3,000
Delivery size 200 400 1,000
Total labour costs are $360,000 for 45,000 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, what will be
the effect on the costs per unit following the change from absorption costing to activity based
costing?’ Place a tick in the boxes in the table below where appropriate.
Increase Decrease
Product X
Product Y
Product ZPls i’m confused on how to solve this question because we are not given the labour hours per unit inorder to complete the absorption costing calculation
Each unit takes the same number of product hours and we do not need to know the hours per unit. The absorption cost per unit will be the fixed costs divided by the total number of units.
Thank you very much. For future questions,So if i do not know the number of hours per unit, I should use the number of units as the basis of absorption?
Most questions will tell you the number of hours per unit if the overheads are being absorbed on an hourly basis.
It is only because this question says that the number of hours per unit is the same for each of the products that it ends up being the same as absorbing over the number of units. If you are not convinced that is the case the try the example again assuming that all units take 2 hours (or 3 hours, or any number of hours you want). You will find that absorbing on an hourly basis ends up giving the same overheads per unit however many hours each unit is taking 🙂
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