You have recently been appointed as management accountant

Product

Dv1

Dv2

Dv3

Output in units

1,200

1,000

1,200

Total direct material cost

£48,000

£50,000

£72,000

Total direct labour cost

£33,600

£21,000

£25,200

Machine hours per unit

8

6

6

Dv1

Dv2

Dv3

£

£

£

Material

48,000

50,000

72,000

Labour

33,600

21,000

25,200

Overhead *

109,440

68,400

82,080

Total cost

191,040

139,400

179,280

Cost per unit

159.20

139.40

149.40

*OAR

Total production overheads

260,000.00

= 11.40 per machine hour

Total Machine Hours

22,800.00

You are considering the introduction activity based costing and the following analysis has been conducted:

Each product passes through two machines. The time on each machine is detailed below:

The production overheads are already captured by each cost centre. An analysis of the £260,000 by the percentage attributable to each department is detailed below. You determine the associated cost drivers for each department and their use by each product, which are also included in the tables below.

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4. Continued

          The activity level for set ups and inspections for each product is as follows:

        Required:

1. Calculate the cost per unit of each product using Activity-Based Costing.

(10 marks)

2. In addition, given that Beacon Ltd aim to achieve a 15% sales margin, calculate the selling prices per unit using both the traditional and ABC costing systems and comment on the results.    

3. The company has an opportunity to lease a machine (machine A) that would serve the same purpose as Machine X. Machine X was originally purchased for £2,000,000 five and a half years ago. At the time of purchase the assumption was that the machine had an estimated useful life of six years with nil residual value and would be depreciated using the straight line method. Depreciation is charged monthly. The machine could be sold for £200,000. The lease costs of the new machine would be £40,000 per month. Recalculate the cost per unit of each product assuming that the company decides to lease machine X. Assume the number of units sold, the selling price per unit calculated using ABC and the time taken on each machine remain the same.

(4 marks)

4. Analyse the impact on Beacon Ltd of leasing machine A.

(3 marks)

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