X Ltd produces a large number of products including the A and the B. The A is a complex product of which 2,000 are made and sold in each period. The B is a simple product of which 50,000 are made and sold in each period. The A requires one direct labour hour to produce and the B requires 0.6 direct labour hours to produce.
X Ltd employs 24 salaried support staff and a direct labour force that works 800,000 direct labour hours per period. Overhead costs are £1,000,000 per period.
The support staff are engaged in three activities – 12 staff engaged in receiving 50,000 consignments of components per period, Six staff engaged in receiving 20,000 consignments of raw materials per period and Six staff engaged in disbursing kits of components and materials for 10,000 production runs per period.
Product A requires 400 component consignments, 100 raw material consignments and 20 production runs per period. Product B requires 200 component consignments, 16 raw material consignments and 10 production runs per period.
- Calculate the overhead cost of the A and the B using a traditional system of overhead absorption based on direct labour hours.
- Identify appropriate cost drivers and calculate the overhead cost of the A and the B using an activity-based costing system.
- Compare your answers to (a) and (b) and explain which gives the most meaningful impression of product costs.
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