• Critically evaluate techniques used to calculate costs of products
• Select and use appropriate short term decision making techniques
Full costing and activity based costing
Gateway plc makes three products, the Nidd, Ouse and Foss. They have
been using full costing for a number of years but have taken the
decision to introduce Activity based costing (ABC) from the start of
the next financial year. However, before making the change they wish
to understand the implications and have asked you to help.
The management accountant has prepared the following information:
Nidd Ouse Foss
Production volume (units) 8,000 6,000 500
Direct materials costs per unit (£) 20 15 40
Direct Labour hours per unit (hrs) 3 5 12
Direct labour cost per hour (£) 15 20 15
Machine hours per unit (hrs) 3 2 8
No. of production runs 30 40 20
Number of deliveries 300 200 100
Number of receipts 40 60 400
Selling price per unit (£) 300 375 800
Analysis of overheads
Overhead Cost driver £’000
Inspection costs No. of production runs 360
Distribution Number of deliveries 600
Material handling costs Number of receipts 350
Engineering No. of production runs 720
Machine related costs No. of machine hours 800
For full costing they currently overheads on the basis of direct
labour hours but are aware they could use machine hours instead.
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