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Dear Sir,
10. 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 is the
increase or decrease in unit costs for Z arising from the change from Absorption Costing to Activity Based Costing?A. Decrease of $14 per unit
B. Increase of $14 per unit
C. Decrease of $30 per unit
D. Increase of $30 per unit
Answer: A
Absorption costing
Since the time per unit is the same for each product, the overheads per unit will also be the same.
$156,000 ÷ 6,000 units = $26
Activity based costing
Number of deliveries for X (1,000/200) 5
Number of deliveries for Y (2,000/400) 5
Number of deliveries for Z (3,000/1,000) 3
Total 13
Cost per delivery = $156,000/13 = $12,000
Cost per unit of Z = ($12,000/3,000 units) × 3 deliveries = $12
Decrease = $26 – $12 = $14.
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I do not understand why the answer that was provided need to multiply by 3 deliveries
‘Cost per unit of Z = ($12,000/3,000 units) × 3 deliveries = $12’Isn’t cost per unit of Z = 12,000/3000=$4? why need to add the deliveries if the question is asking what is the unit cost?
Could you kindly explain? Thank you in advance.
You must not type out complete question here because it is breach of copyright which is a problem for us.
There are 3 deliveries for Z and the cost per delivery is $12,000.
Therefore the total cost for product Z is 3 x $12,000 = $36,000.Therefore the cost per unit is $36,000 / 3,000 = $12.
I do suggest that you watch my free lectures on this. The lectures are a complete free course for Paper F5 and cover everything needed to be able to pass the exam well.
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