- May 14, 2019 at 7:29 am
A company makes two products using the same type of materials and skilled workers. The following information is available:
Product A Product B
Budgeted volume (units) 1,000 2,000
Material per unit ($) 10 20
Labour per unit ($) 5 20
Fixed costs relating to material handling amount to $100,000. The cost driver for these costs is the volume of material purchased.
General fixed costs, absorbed on the basis of labour hours, amount to $180,000.
Using activity-based costing, what is the total fixed overhead amount to be absorbed into each unit of product B (to the nearest whole $)?
One thing here i cannot understand is why the total material costs which are $50,000 for both A and B are not converted into kgs(like 1000/10=100 kgs for A) because the cost driver is the volume of material purchased .So by that logic the answer should be D not B.Can you please explain?May 14, 2019 at 8:37 am
You cannot convert the material into kgs, because you do not know the cost per kg.
Given that it is the same material used for both products, then whatever the cost per kg actually is, you will get the same absorbed amounts by using the total cost of material.
So the total cost of material is (1,000 x $10) + (2,000 x $20) = $50,000. Therefore the absorption rate is $100,000/$50,000 = $2 per $1 of material.
So the amount absorbed into product B is $20 x $2 = $40 per unit.
(This is exactly the same principle that is used to absorb the general fixed costs on labour hours, given that we do not know the labour cost per hour. It seems that you are happy absorbing the general fixed costs.)May 16, 2019 at 12:32 pm
thanks Sir! all clear
Yes i am fine with regards to the general fixed costs part .
so 4*20=$80May 16, 2019 at 1:40 pm
You are welcome 🙂
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