Predetermined Overhead Allocation Rate Questions


Question 2 (answer all parts of the question) Tiger Ltd. manufactures three different products and the table below shows the forecasts for the coming financial year: Product A Product B Product C Volume of production (units) 20,000 10,000 30,000 Direct labour (hours) 2,000 1,000 3,000 Direct materials (Kgs) 250,000 150,000 400,000 Direct labour and material costs £40,000 £40,000 £45,000 Machine hours 15,000 5,000 10,000 Production runs 65 190 135 The company has also made the following forecasts in relation to its manufacturing overheads: Activity Amount Cost driver Level Servicing/maintenance £139,000 Machine hours 30,000 Production scheduling £130,000 Production runs 390 Materials handling £320,000 Quantity of material (Kgs) 800,000 Total £589,000 Required: i. Compute unit product costs for all three products using traditional absorption costing in which overheads are recovered (use direct labour hours as the basis for the recovery of overheads). (35 marks) ii. Calculate unit product costs for all three products using activity based approach (35 marks) iii. Comment on the quality of the management information provided by ABC in relation to costing, pricing and control. (Maximum 250 words) (30 marks)

Explanation & Answer length: 250 words.

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