FDM6 Strategic Management Accounting tools and techniques
Absorption and activity based costing exercise 1
Apollo manufactures and sells several products, two of which are Alpha and Beta.
Estimated data for the two products for the forthcoming period is as follows:
(i)
Product data
Production/sales units
Alpha
5,000
Beta
10,000
Other
40,000
Total direct material cost
Total direct labour cost
£000
80
40
£000
300
100
£000
2,020
660
(ii)
Variable overhead cost is £1,500,000 of which 40 percent is related to the
acquisition, storage and use of direct materials and the remainder is related to
the control and use of direct labour.
(iii)
It is current practice for Apollo plc to absorb the two types of variable
overhead cost to products using an overall company-wide percentage based
either on direct material cost or direct labour cost as appropriate.
(iv)
Apollo are considering the use of activity-based costing. The cost drivers for
material and labour related overheads have been identified as follows:
Direct material related overheads – cost driver is weight of material
Alpha
Beta
Weight of material/unit
4
1
Other
1.5
Direct labour related overheads – cost driver is number of labour operations
Alpha
Beta
Other
Labour operations/unit
6
1
2
(v)
Market investigation indicated that market prices for Alpha and Beta of £75 and
£95 per unit respectively will achieve the estimated sales shown in (i) above.
(vi)
Apollo require a minimum estimated contribution to sales ratio of 40 per cent
before proceeding with the production or sale of any product.
Requirements
(a)
Prepare estimated unit product costs for Alpha and Beta where the variable
overhead is charged to product units as follows:
(i)
Using the existing absorption rates as detailed above,
(ii)
Using an activity-based costing approach.
(b)
Using the information in (a) prepare an analysis that will help Apollo determine
whether both A and B should remain in production. Your answer should include
relevant calculations and discussion and be prepared in a form suitable for
presentation to management.
(c)
Explain how Apollo could make use of target costing in conjunction with
activity based costing with respect to Alpha and Beta.