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:
Labour hours per unit
Machine hours per unit
Materials cost per unit
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.
(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
Costs relating to machinery
Costs relating to materials handling
Costs relating to inspection
Total production overhead
The following total activity volumes are associated with each product line for the period as a whole:
Number of set-ups
Number of movements of materials
Number of inspections
(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.