ABC Ltd produces a large number of products including A and B. A is a complex product

of which 1,000 are made and sold in each period. B is a simple product of which 25,000 are

made and sold in each period. A requires one direct labour hour to produce and B requires

0.6 direct labour hours to produce.

ABC Ltd employs twelve salaried support staff and a direct labour force that works

400,000 direct labour hours per period. Overhead costs are £500,000 per period.

The support staff are engaged in three activities – six staff engaged in receiving 25,000

consignments of components per period, three staff engaged in receiving 10,000 consignments

of raw materials per period and three staff engaged in disbursing kits of components

and materials for 5,000 production runs per period.

Product A requires 200 component consignments, 50 raw material consignments and ten

production runs per period. Product B requires 100 component consignments, eight raw

material consignments and five production runs per period.

Requirements

(a) Calculate the overhead cost of A and B using a traditional system of overhead absorption based on direct labour hours;

(b) Identify appropriate cost drivers and calculate the overhead cost of A and B using an activity-based costing system;

(c) Compare your answers to (a) and (b) and explain which gives the most meaningful impression of product costs.