Question

Question 1: Activity-Based Costing (ABC)

Doris Ltd manufactures two models of medical devices for blood testing as follows: N80 and N90. The company is currently using the traditional (absorption) costing method and overhead is applied to the products based on the number of units. Doris Ltd has decided to adopt activity-based costing (ABC) in the coming year. The company data concerning the current period’soperations appear below:

	N80	N90
Units produced	60,000	10,000
Number of parts needed (per unit)	12	20
Price of parts (per part)	$8	$6
Time per unit (minutes)	10	15
Labour hourly rate	$18	$20

From the company’s management information system, you extract the following information on activities, costs and activity drivers for the current period:

Activity	Expected Cost
Batch level activities:
Machine set-up (number of machine set-ups)	$165,000
Materials ordering (number of orders)	$180,000
Machine hours (machine hours)	$120,000
Injection moulding (injection moulding batches)	$18,000
Product level activities:
Product design (number of product designs)	$10,000
Product requisitions handling (number of product requisitions)	$90,000
Customer level activities:
Customer order (number of customer orders)	$9,000
Facility level activities:
Security (square metres of facilities)	$36,000
Total Overhead	$628,000

Activity drivers for the current period	N80	N90
Number of machine set-ups	100	200
Number of orders	2,000	3,000
Machine hours	8,000	12,000
Injection moulding batches	8	2
Number of product designs	20	30
Number of product requisitions	12,000	6,000
Number of customer orders	200	250
Square metres of facilities	1,200	1,800

5

Question 1 continued:

Required:

1. Compute the predetermined overhead rate under the current absorption costing method and determine the full unit product cost of each product. Round the unit costs and all other costs to 4 decimal places.

2. Determine the full unit product cost of each product using the activity-based costing approach. Round the unit costs and all other costs to 4 decimal places.

   (Total marks for the question 32 marks)

Enter your answers for the following sub-questions in Part A on Canvas. Enter all your answers as numbers without the $ sign. Ensure you show the working for all sub-parts in your Part B Word document.

NO	Sub-question	Marks
1	How much is the overhead rate per unit for N80 under current traditional costing?	2
2	How much is the overhead rate per unit for N90 under current traditional costing?	2
3	How much is the full product cost per unit for N80 under current traditional costing?	2
4	How much is the full product cost per unit for N90 under current traditional costing?	2
5	How much is the Unit level overhead rate per unit for N80 under ABC?	2
6	How much is the Unit level overhead rate per unit for N90 under ABC?	2
7	How much is the Batch level overhead rate per unit for N80 under ABC?	2
8	How much is the Batch level overhead rate per unit for N90 under ABC?	2
9	How much is the Product level overhead rate per unit for N80 under ABC?	2
10	How much is the Product level overhead rate per unit for N90 under ABC?	2
11	How much is the Customer level overhead rate per unit for N80 under ABC?	2
12	How much is the Customer level overhead rate per unit for N90 under ABC?	2
13	How much is the Facility level overhead rate per unit for N80 under ABC?	2
14	How much is the Facility level overhead rate per unit for N90 under ABC?	2
15	How much is the Full unit cost per unit for N80 under ABC?	2
16	How much is the Full unit cost per unit for N90 under ABC?	2
Total marks for the question		32

Answer 1

Given information

	N80	N90
Units produced	60,000	10,000
Number of parts needed per unit	12	20
Price per part	$8	$6
Direct materials cost (part)	$96 (12 x $8)	$120 (20 x $6)
Time per unit (minutes)	10	15
Labour hourly rate	$18	$20
Direct Labour cost per part	$3 [$18 x (10/60)]	$5 [$20 x (15/60)]

Activity	Expected Cost
Batch level activities:
Machine set-up (number of machine set-ups)	$165,000
Materials ordering (number of orders)	$180,000
Machine hours (machine hours)	$120,000
Injection moulding (injection moulding batches)	$18,000
Product level activities:
Product design (number of product designs)	$10,000
Product requisitions handling (number of product requisitions)	$90,000
Customer level activities:
Customer order (number of customer orders)	$9,000
Facility level activities:
Security (square metres of facilities)	$36,000
Total Overhead	$628,000

1. Calculation of predetermined overhead rate under current absorption method (Number of units produced):

Total overheads = $628,000

Total number of units produced = 60,000 + 10,000 = 70,000

predetermined overhead rate = Total overheads / Total number of units produced = $628,000 / 70,000 = $8.9714

2. Calculation of Total cost per unit using absoption costing method:

	N80	N90
Direct materials cost per unit	$96	$120
Direct labour cost per unit	$3	$5
Overhead cost per unit	$8.9714	$8.9714
Total cost per unit	$107.9714	$133.9714

3. Calculation of overhead activity rate under the ABC system:

Activity	Expected Cost	Number of Activites	Activity Rate
(A)	(B)	(C)	(D) = (B) / (C)
Batch level activities:
Machine set-up (number of machine set-ups)	$165,000	300 (100+200)	$550
Materials ordering (number of orders)	$180,000	5,000 (2,000+3,000)	$36
Machine hours (machine hours)	$120,000	20,000 (8,000+12,000)	$6
Injection moulding (injection moulding batches)	$18,000	10 (8+2)	$1,800
Product level activities:
Product design (number of product designs)	$10,000	50 (20+30)	$200
Product requisitions handling (number of product requisitions)	$90,000	18,000 (12,000+6,000)	$5
Customer level activities:
Customer order (number of customer orders)	$9,000	450 (200+250)	$20
Facility level activities:
Security (square metres of facilities)	$36,000	3,000 (1,200+1,800)	$12
Total Overhead	$628,000

4. Calculation of Total cost per unit using ABC system:

	N80	N90
Batch level activities:
Machine set-up	$55,000 (100 x $550)	$110,000 (200 x $550)
Materials ordering	$72,000 (2,000 x $36)	$108,000 (3,000 x $36)
Machine hours	$48,000 (8,000 x $6)	$72,000 (12,000 x $6)
Injection moulding	$14,400 (8 x $1,800)	$3,600 (2 x $1,800)
Product level activities:
Product design	$4,000 (20 x $200)	$6,000 (30 x $200)
Product requisitions handling	$60,000 (12,000 x $5)	$30,000 (6,000 x $5)
Customer level activities:
Customer order	$4,000 (200 x $20)	$5,000 (250 x $20)
Facility level activities:
Security	$14,400 (1,200 x $12)	$21,600 (1,800 x $12)
Toal overheads	$271,800	$356,200
Total units Produced	60,000	10,000
Overhead cost per unit	$4.53 ($271,800 / 60,000)	$35.62 ($356,200 / 10,000)
Direct materials cost per unit	$96	$120
Direct labour cost per unit	$3	$5
Total cost per unit	$103.53 (4.53+96+3)	$160.62 (35.62+120+5)

Sub-Questions:

1. Calculation of overhead rate per unit for N80 under current traditional costing:

Overhead rate per unit for N80 under current traditional costing (See Statement  1 above) = $8.9714

2. Calculation of overhead rate per unit for N90 under current traditional costing:

Overhead rate per unit for N90 under current traditional costing (See Statement  1 above) = $8.9714

3. Calculation of full product cost per unit for N80 under current traditional costing:

Full product cost per unit for N80 under current traditional costing (See Statement 2 above) = $107.9714

4. Calculation of full product cost per unit for N90 under current traditional costing:

Full product cost per unit for N90 under current traditional costing (See Statement 2 above) = $133.9714

5. Calculation of Unit level overhead rate per unit for N80 under ABC:

Unit level overhead rate per unit for N80 under ABC (See Statement 4 above) = $4.53

6. Calculation of Unit level overhead rate per unit for N90 under ABC:

Unit level overhead rate per unit for N80 under ABC (See Statement 4 above) = $35.62

7. Calculation of Batch level overhead rate per unit for N80 under ABC:

	N80 ($)
Total Batch level overhead cost	$189,400
Total units produced	60,000 units
Batch level cost per unit	$3.1567 per unit

8. Calculation of Batch level overhead rate per unit for N90 under ABC:

	N90 ($)
Total Batch level overhead cost	$293,600
Total units produced	10,000 units
Batch level cost per unit	$29.36 per unit

9. Calculation of Product level overhead rate per unit for N80 under ABC:

	N80 ($)
Total Product level overhead cost	$64,000
Total units produced	60,000 units
Batch level cost per unit	$1.0667 per unit

10. Calculation of Product level overhead rate per unit for N90 under ABC:

	N90 ($)
Total Product level overhead cost	$36,000
Total units produced	10,000 units
Batch level cost per unit	$3.60 per unit

11. Calculation of Customer level overhead rate per unit for N80 under ABC:

	N80 ($)
Total Customer level overhead cost	$4,000
Total units produced	60,000 units
Batch level cost per unit	$0.0667 per unit

12. Calculation of Customer level overhead rate per unit for N90 under ABC:

	N90 ($)
Total Customer level overhead cost	$5,000
Total units produced	10,000 units
Batch level cost per unit	$0.50 per unit

13. Calculation of Facility level overhead rate per unit for N80 under ABC:

	N80 ($)
Total Facility level overhead cost	$14,400
Total units produced	60,000 units
Batch level cost per unit	$0.24 per unit

14. Calculation of Facility level overhead rate per unit for N90 under ABC:

	N90 ($)
Total Facility level overhead cost	$21,600
Total units produced	10,000 units
Batch level cost per unit	$2.16 per unit

15. Calculation of Full unit cost per unit for N80 under ABC (as per Statement 4):

	N80 ($)
Direct materials cost per unit	$96
Direct labour cost per unit	$3
Overhead cost per unit	$4.53
Total cost per unit	$103.53

16. Calculation of Full unit cost per unit for N90 under ABC (as per Statement 4):

	N90 ($)
Direct materials cost per unit	$120
Direct labour cost per unit	$5
Overhead cost per unit	$35.62
Total cost per unit	$160.62