Management Accounting Case Study 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.
Calculate the following for each product:
• Marginal cost (Cost/unit and Contribution/unit).
• Traditional full cost (Cost/unit and profit/unit) absorbing overheads on the basis of direct labour hours.
• Traditional full cost (Cost/unit and profit/unit) absorbing overheads on the basis of machine hours.
• Activity based cost (Cost per unit and profit per unit).
Critically evaluate the decision to implement Activity Based Costing In answering this question you should focus on the impact this decision will have on Gateway’s planning, control and decision making. Refer to your calculations in task 1 to illustrate your points and include relevant academic research to support your ideas.
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