Question

BETA Ltd has two production departments (P1 and P2) in its factory. Overheads in each department are currently absorbed into product costs on the basis of machine hours worked.

The production overhead absorption rate in Department P1 is K5·60 per machine hour. In Department P2 the absorption rate is to be established from the following data relating to the department for a period:

	K
Allocated production overheads	24,260
Apportionment of factory level production overheads	37,539
Apportionment of service department production overheads	32,911
	94,710
Machine hours worked	11,550

The company is considering the introduction of a revised overhead apportionment system using activity-based costing.

The overheads incurred in the factory in the period have been re-classified into activities, and cost drivers for each activity have been identified and measured, as follows:

Activity		Overhead		Cost driver		Cost driver volume (Depts P1 and P2)
		K
Machine set up		22,224		batches		100
Machine operation		69,255		machine hours		25,650
Inspection and testing		42,816		units produced		446,000
Servicing		39,375		labour hours		18,750
Total		173,670

The following actual information is available for the period relating to Product X, one of the products manufactured in the factory:

1. 8 batches
2. 2,540 machine hours (Department P1: 1,400 hours; Department P2: 1,140 hours)
3. 58,068 units produced
4. 2,303 labour hours

Required:

1. Using the existing absorption method:

1. Calculate the production overhead absorption rate in Department B;          [2 Marks]

2. Calculate the production overhead cost per unit of Product X.                    [3 Marks]

2. Using an activity-based approach:

1. Calculate a production overhead absorption rate for each activity;                [4 Marks]

2. Calculate the production overhead cost per unit of Product X.                    [5 Marks]

3. Describe possible outcomes of a change to an activity-based approach to overhead absorption from a traditional absorption costing method.            [6 Marks]

[TOTAL: 20 MARKS]

Answer 1

Answer is given below with working