TUTORIAL TWO
Answer Q1& Q2 and Q3 is for self-study
ABC TUTORIAL EXERCISES
1. ABC Ltd has a machine intensive manufacturing production system. It manufactures four
products: A, B, C and D. Output and cost data for the period just ended are as follows:
Output
Units
A
B
C
D
8
16
80
100
Number of
Production
Runs in the
period
Number
Direct labour Machine of
Material cost hours per
hours inspections
per unit
unit
per unit in the
period
£
2
2
5
5
14
18
60
20
80
1
1
1
2
1
2
1
3
3
3
4
10
20
Direct labour cost per hour is £5. Overhead costs are as follows:
£
2,520
Production overheads
Set-up costs and materials
handling costs
Inspection costs
18,760
8,960
30,240
Task One
Calculate total product costs individually for A, B, C and D and the cost per unit of A, B, C
and D using the following approaches:
(a)
(b)
Absorption costing using a machine hour basis of overhead absorption
Activity Based Costing (ABC) using the following cost drivers:
Overhead
Production overheads
Set-up costs and materials handling
costs
Inspection costs
Cost Driver
Total number of machine hours
Number of production runs in the period
Number of inspections in the period
Task Two
Comment on the significance of the differences between the product costings you have
produced.
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2. Questions for ‘The costs of activity-based management’, Armstrong (2002), 27, 99-120
1.
2.
3.
4.
5.
6.
7.
8.
According to Armstrong, in the 1970’s and 1980’s, how were the salaries of office
workers costed compared with the wages of production workers?
Why does Armstrong describe the costing of office staff salaries as an employment
shelter?
Why was ABC popular with production managers?
What does Armstrong regard as the key difference between ABC and ABM?
What does Armstrong regard as the problem with ABM for staff functions?
What does Armstrong regard as the hidden agenda of ABC and why?
Why does Armstrong think treating indirect costs as direct is problematic?
According to Armstrong, what type of control measures arise from ABM, how have
they been applied and what have been some of the results?
3. The following information relates to E.Z. plc for period January – March. (Self-study)
Product
Wood
Machine hours/unit
Direct labour hours/unit
Output (units)
Purchase orders
Set ups
Cartons
Metal
10
6
10,000
10
12
5,000
Plastic
8
6
12,000
8
20
4,000
12
3½
8,000
12
10
2,000
Overheads traced to activities:
£
Purchasing
Setting up
Packaging
Supervision of direct labour
Other production overhead
(Deemed to be output related)
90,000
126,000
440,000
32,000
480,000
Required:
(a) E.Z. plc uses a machine hours Overhead Absorption Rate. Calculate the overhead
cost/unit for each product on this basis.
(b) Compare to the results using an Activity Based Costing approach.
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