Financial Management: Absorption Costing and Activity Based Costing

FINANCIAL MANAGEMENT

Table of Contents
MAIN BODY...................................................................................................................................3
Q.1................................................................................................................................................3
Q.2................................................................................................................................................6
Q.3................................................................................................................................................8
REFERENCES................................................................................................................................1

MAIN BODY
Q.1
PART A
Labour Hours
Details Lip- Gloss Lip-Stick Lip-balm
Units Produce 3,000 30,000 35,000
DM Cost 10 5 10
DL Cost 10 15 10
DL Hour 2 3 2
Other Cost
Set up costs 120000
30000
15000
65000
230000
Machining
Receiving
Despatch
Total overheads
Unit produce 3,000 30,000 35,000
DL Hr/ per unit 2 3 2
Labour Hr 6000 90000 70000
Total labour hours 166000
Overhead Absorption
Rate (230000/166000)
=1.39
1.39×2
=2.78
1.39×3
=4.17
1.39×2
=2.78
Absorption costing per unit are:

DM Cost 10 5 10
DL Cost 10 15 10
Overhead Cost/ per
unit
2.78 4.17 2.78
Total cost per unit 22.78 24.17 22.78
Sales price per unit 22 26 24
Profit / (Loss) -2.17 3.22 1.22
Calculations:
Sales Price — Cost:
1. Profit/Loss from Lip Gloss = 24-22.78
= 1.22/ Per unit.
2. Profit/Loss from Lip Stick = 22 – 24.17
= (2.17)/ Per unit
3. Profit/Loss from Lip Balm = 26 – 22.78
= 3.22 /Per unit
PART B
Activity Based Costing
Details Basis of
allocation
Lip- Gloss Lip-Stick Lip-balm
Set up cost Total set up cost 4%
4,800
40%
48,000
56%
67,200
Machine cost Total Machine
Hours
(2,72,000/65000)
12,000 hr.
5%
3,250
120,000 hr.
44%
28,600
140,000hr.
51%
33,150
Despatch cost Total order
despatched
20%
3,000
40%
6,000
40%
6,000