Question

Anfield Ltd makes two similar products, the Kemlyn and the Kop – the Kemlyn is a basic version, the Kop is a premium version, and information relating to each of these products is set out below.

	Kemlyn	Kop
Selling price per unit	£90	£180
Annual sales volume	9,000 units	24,000 units
Number of sales invoices issued each year	800	350
Labour time per unit	3 hours	6 hours
Labour rate per unit	£15	£15
Material cost per unit	£35	£40
Size of each production batch	1000	500
Bought in parts per unit	2	1
Machine set-ups per batch	5	10

Anfield Ltd would like to move from their traditional absorption costing approach to an activity based costing (ABC) approach. The Finance Director at Anfield Ltd has recently produced the following analysis of overheads and their relevant cost drivers.

Type of overhead	Cost driver	£
Bought in parts handling costs	Number of bought in parts	147,000
Materials handling costs	Number of production batches	45,600
Sales invoicing costs	Number of invoices issued	63,250
Machine set-up costs	Number of machine set-ups	31,500
All other overheads	Labour hours	85,500
Total overhead costs		372,850

Required

1. Calculate the total cost per unit and profit or loss per unit for each product using an activity-based costing method.                                                                           

2. Advise the Finance Director on what actions should be taken following your ABC analysis of the Kemlyn and Kop products.                                                                        

Answer 1

Q-1) Total cost and profit per unit

Note - It is assumed that the material price and labor rate given are not for per unit of output but for per unit of material and labor hour respectively

The pricing of kemlyn is not fixed properly, since it results in a loss per unit. Even the material and labor cost are not covered by the selling price, Hence it is recommended to fix selling price in such a way that there exists profit. During this price fixation the management has to consider whether any increase in price would result in reduction in quantity of goods sold.

a) Computation of Overhead cost per unit

b) Computation of Activity rate

c) Computation of cost driver quantity