Question 10: Absorption Costing and ABC Trusty Electronics Limited manufactures

Question

Question 10: Absorption Costing and ABC Trusty Electronics Limited manufactures only two (2) products: a major headset part, and a dishwasher The company uses the activity-based costing system with the three main cost drivers of activity noted in the table below. Any additional overhead costs are currently allocated using a plant-wide overhead rate External cost consultants have recommended, however, that the company should switch to a traditional absorption costing system. based on direct labour hours. The company estimates that during 2020 it (the company) will produce 21,000 major headset parts/units, and 14,000 dishwashers. Each major headset unit requires three (3) direct labour hours to produce w the dishwashers take four (4) direct labour hours to produce. The direct material and direct labour costs included in the two products are as follows: Items Direct Labour (per component) Dires Matcnal per conponen) Headset Unit $120 S56 Dishwasher $87 The budgeted (estimated) total factory overhead data for 2018 is given as: Budgeted Overhead (S) Estimated Volume Items Production Set-Ups Material Handling Packaging and Shipping Total Factory Overhead $3,480,000 S1,570,000 $2,520,000 S11,970,000 30 Set-Ups 15,000 kgs 9,000 boxes Based on analysis of the consultants of the three overhead activities, it is estimated the two production activities in 2018 is as follows: Headset Unit Overall 30 Set-U Dishwasher Activity Production Set-Ups Material Handling 10 Set-Ups20 Set-Ups 10,000 kgs 5,000 boxes 5,000 kgs15,000 kgs Packaging and Shipping 4,000 boxes 9,000 boxes Required: A. Calculate the cost of both products based on a traditional plant-wide rate using direct labour costs to assign overheads. B. Calculate the activity cost rates for: a. Set-Ups; b. Material Handling c. Packaging and Shipping. C. Cost the two products using an activity-based costing system. 13

Explanation / Answer

Overhead per component is basically allocated overhead amount per unit of headset / diswasher manufactured.

We have been given that 21000 units of headsets and 14000 units of dishwashers shall be produced.

Overhead per component is simply total overheads / no of units to be produced.

Eg: Production set up per headset = 1160000 / 21000 = 55.2381

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