Calculate unit cost per product using activity based costing

Reference no: EM13907508

Jones Ltd produces four products, namely Pl, P2, P3 and P4. The following figures represent the budget information per unit of each product:

	Annualvolume	Material per unit	Direct labour hours	Selling priceper unit
	(units)	£	per unit	£
P1	100	60	5	110
P2	1,000	60	5	110
P3	100	180	15	330
P4	1,000	180	15	330

The budgeted cost per direct labour hour is £5. The company currently absorbs overheads into products on the basis of a direct labour overhead absorption rate. The budgeted overhead for the year is £66,000 and the amount related to each activity is shown below:

Annual Annual consumption of overhead Cost cost driver by product

Activity cost (£) driver P1 P2 P3 P4 Total

Setting up	30,000	Number of	2	10	5	13	30
jobs		set ups
Ordering	15,000	Number of	4	4	2	5	15
material		material
		orders
Material handling	21,000	Number of times	6	50	20	24	100
		material
		handled					66,000

The company uses a full cost plus pnong system. The sales manager of the company is currently worried about P4 since sales of this product seem to be under pressure from competitors in a market which is becoming particularly price sensitive.

You are required to:

(a) Calculate the unit cost per product using the company's tradi tional method of absorbing overheads into products.

(b) Calculate the unit cost per product using activity based costing as the method of absorbing overhead costs into the products.

(c) Discuss the results disclosed by a comparison between the two methods of absorbing overheads into the products and the implications for the company.

Reference no: EM13907508

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