(b) Activity based costing (8 marks)
K Tel manufactures knife sharpeners. Traditionally, a plant wide rate of $200 per direct labour hour has been used to allocate overhead to its products. The accountant believes it is time to find a better method of cost allocation and has established the following relationships between activities and overhead:
Activity Cost Driver Allocation Rate
Material handling Number of parts $2 per part
Assembly Labour hours $20 per hour
Inspection Inspection time $3 per minute
(i) What is the overhead cost per unit from a batch of 1,000 sharpeners using the traditional method? The batch requires 2,000 parts, 20 direct labour hours and 30 minutes of inspection time (2 marks) (Show all workings).
(ii) What is the overhead cost per unit from a batch of 1,000 sharpeners using the ABC method? (3 marks) (Show all workings)
(iii) Many companies that have previously applied overhead costs to final products using Direct Labour hours as the cost driver have changed to other cost drivers, such as machine hours. Why? (3 marks)
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