Additional Questions for Topic 4

1. Triple Products Ltd manufactures three products Hay, Bee and Cee. At present, the company
uses a traditional absorption costing system to establish the costs of production. Budgeted
production data for the next period is as follows:

Hay Bee Cee

Production units 1,000 800 400
Material per unit at RM5/kg 5kg 10kg 7.5kg
Labour per unit at RM 9/hr 2hrs 2hrs 3hrs
Machine time per unit 2hrs 1.5hrs 2hrs

Variable production overheads are budgeted to be absorbed at RM 3.50 per labour hour.

Fixed production overheads for the period are budgeted to be RM 66,000, absorbed on a
machine hour basis.

The company is considering the introduction of an activity based costing system.

Further investigation has revealed the following activities and related overhead costs:

Activities Costs (RM)

Production inspection 24,000
Machine set-up 16,000
Machine maintenance 12,000
Packing and dispatch 6,000
Material handling 8,000
66,000

Other information:
(a) Budgeted orders for next period: Hay 10 orders; Bee and Cee 5 orders each. Each order is
expected to require one machine set up and two inspections.
(b) Machine maintenance is carried out regularly based on a predetermined number of machine
running hours.
(c) Each product is packed and dispatched in crates containing the following number of products
per crate: Hay 50 units, Bee 25 units and Cee 50 units. The number of crates used influences
product dispatch costs.
(d) Machine handling costs are influenced by the quantity of material used.

Required:
Calculate the production cost of one unit of each product using:
a) Traditional absorption costing
b) Activity based costing
2. Cabell Company manufactures two products, Product C and Product D. The company
estimated it would incur $99,590 in manufacturing overhead costs during the current period.
Overhead currently is applied to the products on the basis of direct labor-hours. Data
concerning the current period's operations appear below:

Required:
a. Compute the predetermined overhead rate under the current method, and determine the
unit product cost of each product for the current year.
b. The company is considering using an activity-based costing system to compute unit
product costs for external financial reports instead of its traditional system based on direct
labor-hours. The activity-based costing system would use three activity cost pools. Data
relating to these activities for the current period are given below:

Determine the unit product cost of each product for the current period using the activity-
based costing approach.

3. Verne Manufacturing Corporation has a traditional costing system in which it applies

manufacturing overhead to its products using a predetermined overhead rate based on direct
labor-hours (DLHs). The company has two products, F22S and C45U, about which it has
provided the following data:
The company's estimated total manufacturing overhead for the year is $1,697,280 and the
company's estimated total direct labor-hours for the year is 48,000.

The company is considering using a variation of activity-based costing to determine its unit
product costs for external reports. Data for this proposed activity-based costing system
appear below:

Required:
a. Determine the unit product cost of each of the company's two products under the
traditional costing system.
b. Determine the unit product cost of each of the company's two products under activity-
based costing system.