Comparison of traditional product costing with abc

Question

Problem:

Comparison of traditional product costing with ABC

Duo plc produces two products A and B. Each has two components specified as sequentially numbered parts i.e. product A (parts 1 and 2) and product B (parts 3 and 4). Two production depart­ments (machinery and fitting) are supported by five service activities (material procurement, material handling, maintenance, quality control and set up). Product A is a uniform product manufactured each year in 12 monthly high volume production runs. Product B is manufactured in low volume cus­tomised batches involving 25 separate production runs each month. Additional information is as follows:

	Product A			Product B
Production details:
Components	Parts 1, 2			Parts 3, 4
Annual volume produced	300 000 units			300 000 units
Annual direct
labour hours:
Machinery department	500 000 DLH - 600 000 DLH
Fitting department	150 000 DLH			200 000 DLH
Overhead Cost Analysis
Overhead Cost Analysis	(E000s)
Material handling	1500
Material procurement	2000
Set-up	1500
Maintenance	2500
Quality control	3000
Machinery (machinery power, depreciation etc.)	2500
Fitting (machine, depreciation, power etc.)"	2000
	15000
Cost Driver Analysis
Cost Driver	Part 1	Part 2	Part 3		Part 4
Material movements	180	160	1 000		1 200
Number of orders	200	300	2 000		4 000
Number of set-ups	12	12	300		300
Maintenance hours	7000	5000	10000		8000
Number of inspections	360	360	2400		1000
Direct labour hours	150000	350000	200000		400000
Direct labour hours	50000	100000	60000		140000

You are required to compute the unit costs for products A and B using (i) a traditional volume-based product costing system and (ii) an activity-based costing system.