ABC - Excel - Duff Co.

Qusestion 1

Duff Co manufactures three products, X, Y and Z. Demand for products X and Y is relatively elastic whilst demand for product Z is relatively inelastic. Each product uses the same materialsand the same type of direct labour but in different quantities. For many years, the company has been using full absorption costing and absorbing overheads on the basis of direct labour hours. Selling prices are then determined using cost plus pricing. This is common within this industry, with most competitors applying a standard mark-up.

Budgeted production and sales volumes for X, Y and Z for the next year are 20,000 units, 16,000 units and 22 ,000 units respectively.

The budgeted direct costs of the three products are shown below:

Product                                              X                      Y                      Z

$ per unit        $ per unit       $ per unit

Direct materials                                25                    28                    22

Direct labour ($12 per hour)          30                    36                    24

In the next year, Duff Co also expects to incur indirect production costs of $1,377,400, which are analysed as follows:

Cost pools    $	Cost drivers
Machine set up costs          280,000	Number of batches
Material ordering costs      316,000	Number of purchase orders
Machine running costs       420,000	Number of machine hours
General facility costs          361,400 –––––––––– 1,377,400                                            –––––––––– The following additional data relate to each product:	Number of machine hours

Duff Co wants to boost sales revenue in order to increase profits but its capacity to do this is limited because of its use of cost plus pricing and the application of the standard mark-up. The finance director has suggested using activity based costing (ABC) instead of full absorption costing, since this will alter the cost of the products and may therefore enable a different price to be charged.

Required:

(a)                Calculate the budgeted full production cost per unit of each product using Duff Co’s current method of absorption costing. All workings should be to two decimal places. (3  marks )

(b)                Calculate the budgeted full production cost per unit of each product using activity based costing. All workings should be to two decimal places.(11  marks)

Youtube links

Part 1
https://www.youtube.com/watch?v=F1KDwcZm55A

Part 2
https://www.youtube.com/watch?v=CGM6AfZjzf4

Part 3
https://www.youtube.com/watch?v=dwO4pMLTTew

Part 4
https://www.youtube.com/watch?v=ZqYznAs9MU0