Milano Ltd makes shoes in two ranges such as Basic and Deluxe. Information relat
ID: 2488086 • Letter: M
Question
Milano Ltd makes shoes in two ranges such as Basic and Deluxe. Information relating to each of these products is set out below. Basic Deluxe Selling price per unit £50 £150 Material cost per unit £12 £46 Labour rate per hour £8 £8 Labour time per unit 1 hour 3 hours Annual sales volume 2,000 units 4,000 units Number of sales invoices issued each year 100 200 Number of Quality Inspections each year Number of labour hours each year 50 2,000 150 12,000 The Director of Milano Ltd has produced the following analysis of total overheads per year and their relevant cost drivers. Type of overhead Cost driver £ Quality Inspections Number of quality inspections 40,000 Sales invoicing costs Number of invoices issued 30,000 All other overheads Labour hours 140,000 Total overhead costs 210,000 (a) Calculate the total cost per unit and profit per unit for each product using: (1) the traditional full cost method of overhead absorption (based on labour hours) (5 marks) (2) the activity-based costing method. (5 marks) (a) Comment on results calculated. (5 marks) Total marks (15 marks)Explanation / Answer
Sales Volume (UNITS) 2000 4000 Basic Deluxe Selling Price 50 150 Material Cost per unit 12 46 Labour Rate per hour 8 8 Labour Hours Per unit 1 3 No of sale invoice 100 200 300 No of Quality Inspection. 50 150 200 No. of Labour Hour 2000 12000 14000 OVERHEAD Amount Cost Driver Quality Inspection 40000 No of Quality Inspection. Cost of Sale invoice 30000 No of sale invoice Other Overhead 140000 No. of Labour Hour Traditional full cost method Basic Deluxe Material Cost per Unit 12 46 Labour Cost per unit 8 24 (Labour Hour per unit * Labour rate per hour) 1 * 8 3 * 8 Quality Inspection Cost per unit 2.86 8.57 (Total Cost inspection cost / total no. of labour hour * labour hour) / no. of units (40000/14000 * 2000 )2000 (40000/14000 * 12000)/4000 Cost of Sale invoice 2.14 6.43 (Cost of sales invoice / total no. of labour hour * labour hour) / no. of units (30000/14000 * 2000 )2000 (30000/14000 * 12000)/4000 Other Overheads 10 30 (Other Overhead / total no. of labour hour * labour hour) / no. of units (140000/14000 * 2000 )2000 (140000/14000 * 12000)/4000 Total Cost per Unit 35.00 115.00 Sale price per Unit 50.00 150.00 Profit per Unit ( Sale Price - Cost Price) 15.00 35.00 Activity Based Costing Method Basic Deluxe Material Cost per Unit 12 46 Labour Cost per unit 8 24 (Labour Hour per unit * Labour rate per hour) 1 * 8 3 * 8 Quality Inspection Cost per unit 5.00 7.50 (Total Cost inspection cost / totalQaulity Inspection * Quality Inspection) / no. of units (40000/200 * 50 )2000 (40000/200 * 150)/4000 Cost of Sale invoice 5.00 5.00 (Cost of sales invoice / Total no of sale invoice * Sale Invoice) / no. of units (30000/100 * 300 )2000 (30000/200 * 300)/4000 Other Overheads 10 30 (Other Overhead / total no. of labour hour * labour hour) / no. of units (140000/14000 * 2000 )2000 (140000/14000 * 12000)/4000 Total Cost per Unit 40.00 112.50 Sale price per Unit 50.00 150.00 Profit per Unit ( Sale Price - Cost Price) 10.00 37.50