Question

A company manufactures two products, P and Q. Monthly data relating to production and sales are as follows.

	Product P	Product Q
Direct materisl cost per unit	$40	$50
Direct labor hours per unit	2 hours	4 hours
Direct labor cost per unit	$50	$100
Sales demand	200 units	900 units

Production overheads are $200,000 each month and are absorbed on a direct labor hour basis.

There are five main areas of activity that can be said to consume overhead costs. The management accountant has gathered the following monthly information:

Activity	Total cost $	Cost driver	Total	P	Q
Set up	60,000	Number of setups	6	2	4
Machining	120,000	Machine hours	6,000	600	5,400
Order handling	80,000	Number of orders	4	1	3
Quality control	40,000	Number of inspections	5	1	4
Assembly	20,000	Assembly hours	2,000	500	1,500
	320,000

Calculate the per unit cost (prepare the cost card), for Product P and Q, using

• absorption costing and
• ABC

Answer 1

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