Question

TOKYO LLC produces three products, KFC, MFC, and RFC, all made from the same material. Until now, it has used Absorption Costing System to allocate overheads to its products. The company is now considering using an Activity Based Costing System in order to improve profitability. Information for the three products for the last year is as follows:

                                                                                KFC               MFC                RFC

Production and sales volumes (units in “000”)         25                    20                   15        

Selling price per unit                                                  $20                  $30                  $15

Raw material usage (kg) per unit                               6                      7                      8

Direct labor hours per unit                                          1                      2                      3

Machine hours per unit                                               1                      0.5                   .75

Number of production runs per annum                       10                    15                    20

Number of purchase orders per annum                       10                    20                    30

Number of deliveries to retailers per annum              60                    50                    40

The price for raw materials remained constant throughout the year at $4 per kg. Similarly, the direct labor cost for the whole workforce was $15 per hour. The annual overhead costs were as follows:

OVERHEADS:                    

$

Machine set up costs               50,000

Machine running costs            80,000

Procurement costs                   30,000

Delivery costs                                     80,000

Required:

1. Calculate the cost per unit for products KFC, MFC and RFC under traditional absorption costing, using direct labor hours as the basis for apportionment.

2. Calculate the full cost per unit of each product using activity based costing.

Answer 1