Hamid Ltd produces two products – shoes and belts. At present the company uses absorption costing, based on a labour hours rate, to establish the production overhead costs. The budgeted information for Period 4 is shown below. Product Shoes Belts Production in units 6000 5000 Machine hours per unit 5 hrs 6 hours Labour Hour per unit 3 hours 7 hours The overhead and cost driver information for Period 4 is shown below. Activity Cost in (£) Product Inspection 46,200 Machine Set-up 21,000 Machine maintenance 20,800 Handling and Packaging 26,400 Additional information Product inspection – one in every ten products is inspected. Machine set-up – the company uses a single machine to produce both products. For period 4, 300 setups will be made that will be shared equally between both the products. Machine maintenance – this is based on a predetermined number of machine hours. Product handling and packaging – each product is packed in separate crates containing 50 units. Required: Complete the cost driver table for period 4. You may use the format below. Cost Driver Shoes Belts Number of Inspections Number of Setups Total Machine Hours Number of Packing & Handling Calculate overhead cost per unit for each of the products produced by Hamid Ltd. Explain the usefulness and limitation of ABC costing compared with absorption costing.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Hamid Ltd produces two products – shoes and belts. At present the company uses absorption costing, based on a labour hours rate, to establish the production overhead costs. The budgeted information for Period 4 is shown below.
|
Product |
Shoes |
Belts |
|
Production in units |
6000 |
5000 |
|
Machine hours per unit |
5 hrs |
6 hours |
|
Labour Hour per unit |
3 hours |
7 hours |
The overhead and cost driver information for Period 4 is shown below.
|
Activity |
Cost in (£) |
|
Product Inspection |
46,200 |
|
Machine Set-up |
21,000 |
|
Machine maintenance |
20,800 |
|
Handling and Packaging |
26,400 |
Additional information
Product inspection – one in every ten products is inspected.
Machine set-up – the company uses a single machine to produce both products. For period 4, 300 setups will be made that will be shared equally between both the products.
Machine maintenance – this is based on a predetermined number of machine hours.
Product handling and packaging – each product is packed in separate crates containing 50 units.
Required:
- Complete the cost driver table for period 4. You may use the format below.
|
Cost Driver |
Shoes |
Belts |
|
Number of Inspections |
|
|
|
Number of Setups |
|
|
|
Total Machine Hours |
|
|
|
Number of Packing & Handling |
|
|
Calculate overhead cost per unit for each of the products produced by Hamid Ltd.
Explain the usefulness and limitation of ABC costing compared with absorption costing.
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