A company manufactures two products, L and M, using the same equipment and similar processes. An extract of the production data for these products in one period is shown below.
|
Quantity produced (units)
|
L
5,000
|
M
7,000
|
|
Direct labour hours per unit
|
1
|
2
|
|
Machine hours per unit
|
3
|
1
|
|
Set-ups in the period
|
10
|
40
|
|
Orders handled in the period
|
15
|
60
|
|
Overhead costs
Relating to machine activity
|
|
$ 220,000
|
|
Relating to production run set-ups
|
|
20,000
|
|
Relating to handling of orders
|
|
45,000
|
|
|
|
285,000
|
Required
Calculate the production overheads to be absorbed by one unit of each of the products using the following costing methods.
(a) A traditional costing approach using a direct labour hour rate to absorb overheads
(b) An activity based costing approach, using suitable cost drivers to trace overheads to products