Question

A company manufacturing 2 products furnishes the following data for a year:

Product	Annual output (Units)	Total machine hours	Total number of purchase orders	Total number of machine set-ups
A	5,000	20,000	160	20
B	60,000	120,000	384	44

The annual overheads are:  

	£
Volume Related Activity Costs	550,000
Setup Related Costs	820,000
Purchase Related Costs	618,000

You are required to calculate the cost per unit of each product A and B based on:

1. Traditional method of charging overheads (Absorption Costing)  

2. Activity based costing method  

Answer 1

1. Calculation of cost per unit using Traditional Method of charging overheads (Absorption Costing)

Calculation of overhead rate per machine hour

= total overheads/ total machine hours

=1988000/140000 = 14.20 per MH

Calculation of cost per unit

Particulars	A	B
Total costs (MH rate*MH per product)	284000	1704000
Units produced(output)	5000	60000

Cost per unit.    56.8 28.4

2.ABC method of costing

Calculation of cost driver

Volume Related costs Total costs/ total units	550000/65000	8.46
Setup related costs total costs/ total setup hrs	820000/64	12812.5
Purchase related costs total costs /total of purchase orders	618000/544	1136.02

Calculation of cost per unit

Particulars	A	B	Total
Vol Related costs(units*cost driver)	42300	507600	549900
Setup costs(setup hrs*cost driver)	256250	563750	820000
Purchase RC(purchaseorders*cost driver)	181763.2	436231.68	617994
Total costs	480313.2	1507581.68	1987894
Output units	5000	60000

Cost per unit. 96.06. 25.13

Note: The small amount of difference in total costs is due to rounding off in decimals. Ignore.