9

(b) TABLE 2 shows the cost drivers, the quantity and unit cost of the

cost driver, and total activity cost.

For two products A and B it is found that:

• The direct labour hours for products A and B are the same.

• It takes approximately four times as many machining hours in both cost centres to produce product B as product A.

• Product A requires one quarter of the materials purchased for B.

• Product A requires one third of the total Delivery notes/invoices.

• Product A has issued one third of the total materials issued per production run.

• Product A has issued one half of the planning per production run of that required by Product B.

• Product B requires twice as many machine set-ups as product A.

• The products have the same number of quality control inspections.

If the company produces 50 000 each of products A and B:

(i) Complete TABLE 2 to determine the cost driver unit costings in column 5 for the activities of column 1.  Show also the product quantity splits in column 4 of each activity for product A and B (e.g. quantity of cost driver Activity Centre 1 is shown as  split

100 000 product A and 400 000 product B).

(ii) Determine the overhead activity cost  allocations to products A and B (using the activity proportions calculated in column 4) by completing TABLE 3.

(iii) Determine the total overhead allocations to products A and B.

(iv) Find the per unit product overhead cost allocations for each product.

Activity involved to Produce Product

Activity Centre 1

Machining

Activity Centre 2

Machining

Product Assembly

Materials

Procurement

Activities

Product Materials

Purchase

Product Material

Reception/Storage

Materials

Issued/Production Run

Support Activities

Production Run Planning

Machine Setting

Up/Tooling

Statistical Quality

Control

Total

TeessideUniversity Open Learning

(Engineering)

Allocated Cost

of Activity

£

750 000

500 000

400 000

600 000

240 000

225 000

150 000

30 000

10 000

11

Activity Cost Driver Machine Use hours Machine Use hours

Direct labour hours

Purchase Orders

Number of Invoices or Material Delivery

Notes Number of Production runs Number of Production runs Setting up/tooling labour hours Sample inspection and

Test Cost

TABLE 2

Quantity of Cost

Drivers

500 000

(100 000 prod A

400 000 prod B)

250 000

100 000

5000

3000

1500

1500

750

400

Cost Driver

Unit cost/rate per Cost

Activity Centre 1

Machining

Activity Centre 2

Machining

Product Assembly

Materials

Procurement

Activities

Product Materials

Purchase

Product Material

Reception/Storage

Materials

Issued/Production Run

Support Activities

Production Run Planning

Machine Setting

Up/Tooling

Statistical Quality

Control

Total

Activity

 

 

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