How to calculate the cost per unit for each product , Cost Accounting

Asian Ltd makes three types of gold watch - the Diva (D), the Classic (C) and the Poser (P). A traditional product costing system is used at present; although an activity based costing (ABC) system is being considered. Details of the three products for a typical period are:

Product

Labour hours per unit

Machine hours per unit

Materials cost per unit

Production units

A

0.5

1.5

20

750

C

1.5

1

12

1,250

P

1.0

3

25

7,000

Direct labour costs $6 per hour and production overheads are absorbed on a machine hour basis. The overhead absorption rate for the period is $28 per machine hour.

Required:

(a)    Calculate the cost per unit of each product using the traditional methods, absorbing overheads on the basis of machine hours.

Total production overheads are $654,000 and further analysis shows that the total production overheads can be divided as follows:

Costs relating to set-ups

35%

Costs relating to machinery

20%

Costs relating to materials handling

15%

Costs relating to inspection

30%

Total production overhead

100%

The following total activity volumes are associated with each product line for the period as a whole:

Product

Number of set-ups

Number of movements of materials

Number of inspections

D

75

12

150

C

115

21

180

P

480

87

670

 

670

120

1,000

Required:

(b)   Calculate the cost per unit for each product using ABC principles (work to two decimal places)

(c)  Explain why costs per unit calculated under ABC are often very different to the costs per unit calculated under more traditional methods. Use the information from Asian Ltd to illustrate.

Posted Date: 2/26/2013 7:18:31 AM | Location : United States







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