Refer to Accounting Test Question No.ABC2

(a) Computation of the activity based overheads

Step 1: Compute cost per unit of cost driver

= Cost pool / cost driver volume

Step 2: Compute the volume of cost drivers consumed by Product XX

Step 3: Compute the Activity Based Overheads cost for Product XX

(b) Computation of budgeted overheads costs for Product XX using absorption costing

Budgeted overheads

=($75,000+$96,000+$112,000+$70,000+$150,000)

=$503,000

Budgeted absorption cost/machine hour

=$503,000/50,000

=$10.06

Budgeted machining hours for Product XX=1,500

Budgeted absorbed overhead

=1,500 x $10.06

=$15,090

© Ways in which the company can reduce the ABC for product XX:

• Reduce the number of batches by increasing the batch size which will then reduce the setting overhead, materials handling and inspection costs.
• Reduce the number of purchase orders
• Innovate ways of speeding up production so that the machining hours are reduced.

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