Saturn, a chocolate manufacturer, produces three products :

•The Sky Bar, a bar of solid milk chocolate

•The Moon Egg, a fondant filled milk chocolate egg
•The Sun Bar, a biscuit and nougat based chocolate bar.

Information relating to each of the product is as follows :

Sky Bar Moon egg Sun Bar
Direct labor cost per unit ($) 0.07 0.14 0.12
Direct Material cost per unit ($) 0.17 0.19 0.16
Actual production/sales 500000 150000 250000
Direct Labour Hours per unit 0.001 0.01 0.005
Direct machine hours per unit 0.01 0.04 0.02
Selling Price per unit 0.5 0.45 0.43

Annual production
Machining Cost 5000
Component Cost 15,000
Set- up Costs 30,000
Packing Cost 30,000
80,000

In addition to the above (Saturn), some supplementary data is now available for Saturn Company.

Cost Driver Data Sky Bar Moon Egg Sun Bar Total
Actual production / Sales Units 500,000 150,000 250000
Machine Hours per unit 0.01 0.04 0.02
Number of production set ups 3 1 26 30
Number of components 4 6 20 30
Number of Customer orders 21 4 25 50

Required;

Using ABC costing, calculate the full

production cost per unit and the profit per
unit. Comment on the implications of the
figures calculated.
 OAR = Total OH cost (Each type)/ Cost drived

Annual production Cost Driver

Machining Cost 5000 Machine Hours
Component Cost 15,000 No of Components
Set- up Costs 30,000 No of production set up
Packing Cost 30,000 No of customer orders
80,000

Calcualtion of OAR
Annual production Total cost Total cost driver OAR
Machining Cost 5000 16000 0.3125 Per Machine Hour
Component Cost 15,000 30 500 per components
Set- up Costs 30,000 30 1000 per set up
Packing Cost 30,000 50 600 per customer order
80,000

Working 1 - Total Machien Hours Sky Bar Moon Egg Sun Bar
Actual production / Sales Units 500,000 150,000 250000
Machine Hours per unit 0.01 0.04 0.02
Total 5000 6000 5000 16000

Allocation Overheads
Sky Bar Moon Egg Sun Bar
Machining Cost 1562.5 1875 1562.5 5000
Component Cost 2000 3000 10000 15000

Set- up Costs 3000 1000 26000 30000

Packing Cost 12600 2400 15000 30000
Total 19162.5 8275 52562.5
No of Units 500,000 150,000 250,000
OH cost per unit 0.04 0.06 0.21

Total cost Unit

Sky Bar Moon Egg Sun Bar
Direct Material 0.17 0.19 0.16
Direct Labour 0.07 0.14 0.12
OH cost per unit 0.04 0.06 0.21
Total cost Unit 0.28 0.39 0.49
Profit/(loss) per unit Sky Bar Moon Egg Sun Bar
Selling Price 0.5 0.45 0.43
Total cost per unit 0.28 0.39 0.49
Profit/(loss) 0.22 0.06 -0.06
ABC COSTING

PROFIT/(LOSS) PER UNIT:

SKY BAR MOON EGG SUN BAR
SELLING PRICE 0.5 0.45 0.43
TOTAL COST PER UNIT 0.28 0.39 0.49
PROFIT/(LOSS) PER UNI 0.22 0.06 -0.06

TOTAL COST PER UNIT:

SKY BAR MOON EGG SUN BAR
DIRECT LABOUR 0.07 0.14 0.12
DIRECT MATERIAL 0.17 0.19 0.16
OVERHEAD COST 0.04 0.06 0.21
TOTAL COST PER UNIT: 0.28 0.39 0.49

ANNUAL PRODCTION:
COST POOL COST DRIVER
MACHINING COST 5000 MACHINE HOURS PER UNIT
COMPONENT COST 15000 NUMBER OF COMPONENTS
SET-UP COSTS 30000 NUMBER OF PRODUCTION SET UPS
PACKING COSTS 30000 NUMBER OF CUSTOMER ORDERS
80000

TOTAL MACHINE HOURS:

SKY BAR MOON EGG SUN BAR
MACHINE HOURS PER
UNIT 0.01 0.04 0.02
DEMAND 500000 150000 250000
TOTAL MACHINE HOUR 5000 6000 5000 16000

TOTAL NUMBER OF PRODUCTION SET U 30

TOTAL NUMBER OF COMPONENTS 30
TOTAL NUMBER OF CUSTOMER ORDERS 50

CALCULATION OF OAR:
OAR(OVERHEAD ABSORPTION RATE)= TOTAL OVERHEAD / COST DRIVER
ANNUAL PRODUCTIONTOTAL COST COST DRIVER OAR
MACHINING COST 5000 16000 0.3125
COMPONENT COST 15000 30 500
SET-UP COSTS 30000 30 1000
PACKING COSTS 30000 50 600
OH ALLOCATION:
SKY BAR MOON EGG SUN BAR
MACHINING COST 1562.5 1875 1562.5
COMPONENT COST 2000 3000 10000
SET-UP COSTS 3000 1000 26000
PACKING COSTS 12600 2400 15000
TOTAL OH : 19162.5 8275 52562.5
DEMAND 500000 150000 250000
OH PER UNIT 0.04 0.06 0.21
Jason (LTD) manufactures three products: P, Q, and R.

Data for the period just ended is as follows:

P Q R
Production (units) 20,000 25,000 2,000 20,000
Sales price ( per unit) $20 $20 $20 $20
Material cost (per unit) $5 $10 $10
Labour hours (per unit) 2 hour 1 hour 1 hour
(Labour is paid at the rate of $5 per hour)

Overheads for the period were as follows: $

Set-up costs 90,000
Receiving 30,000
Despatch 15,000
Machining 55,000
190000

Cost driver data:

P Q R
Machine hours per unit 2 2 2
Number of set-ups 10 13 2
Number of deliveries received 10 10 2
Number of orders despatched 20 20 20

(a) Calculate the cost (and hence profit) per unit, absorbing all the overheads on the basis
of labour hours.
(b) Calculate the cost (and hence profit) per unit absorbing the overheads using an Activity
Based Costing approach.
PROFIT(LOSS)PER UNIT:
P Q R
SELLING PRICE 20 20 20
TOTAL COST PER UNIT 18.36 48.89 16.92
PROFIT(LOSS)PER UNIT: 1.64 -28.89 3.08

TOTAL COST PER UNIT:

P Q R
DIRECT MATERIAL 5 10 10
DIRECT LABOUR 10 5 5
OVERHEAD COST 3.36 33.89 1.92
TOTAL COST PER UNIT: 18.36 48.89 16.92

OVERHEADS:
COST POOL COST DRIVER
SET-UP COSTS 90000 NUMBER OF SET-UPS
RECEIVING 30000 NUMBER OF DELIVERIES RECEIVED
DESPATCH 15000 NUMBER OF ORDERS DESPACTHED
MACHINING 55000 MACHINE HOURS
190000

TOTAL MACHINE HOURS:

P Q R

MACHINE HOURS PER UNIT 2 2 2

DEMAND 25000 2000 20000
TOTAL MACHINE HOURS: 50000 4000 40000 94000

TOTAL NUMBER OF SET-UPS 25

TOTAL NUMBER OF
DELIVERIES RECEIVED 22
TOTAL NUMBER OF
ORDERS DESPATCHED 60

CALCULATION OF OAR:
OAR(OVERHEAD ABSORPTION RATE)= TOTAL OVERHEAD/COST DRIVER
OVERHEADS COST DRIVER OAR
SET-UP COSTS 90000 25 3600
RECEIVING 30000 22 1363.64
DESPATCH 15000 60 250
MACHINING 55000 94000 0.59

OVERHEAD ALLOCATION:
P Q R
SET UP COST 36000 46800 7200
RECEIVING 13636.36364 13636.363636 2727.272727273
DESPATCH 5000 5000 5000
MACHINING 29255.31915 2340.4255319 23404.25531915
TOTAL OVERHEADS 83891.68 67776.79 38331.53
DEMAND 25000 2000 20000
OH PER UNIT: 3.36 33.89 1.92
OVERHEADS:

COST POOL COST DRIVER

TOTAL PRODUCTION SET
UP COSTS 140000 NUMBER OF PRODUCTION RUNS
TOTAL INSPECTION COSTS 80000 NUMBER OF INSPECTIONS DURING PRODUCTION
OTHER OVERHEAD COST 96000 LABOUR HOURS
316000
TOTAL NUMBER OF PRODUCTION RUNS 28
TOTAL NUMBER OF INSPECTIONS 8
TOTAL LABOUR HOURS 48000

TOTAL LABOUR HOURS :(working)

C D
DEMAND 1000 4000
LABOUR HOUR PER UNIT 8 10
TOTAL LABOUR HOURS 8000 40000 48000

CALCULATION OF OAR:
OVERHEADS: COST DRIVER OAR=OH/COST DRIVER
TOTAL PRODUCTION SET
UP COSTS 140000 28 5000
TOTAL INSPECTION COSTS 80000 8 10000
OTHER OVERHEAD COST 96000 48000 2

WAREHOUSING COST DRIVER OAR=OH/COST DRIVER

HANDLING RECEIPT OF
MATERIALS 215414 NO.OF ORDERS 3700 58.22
ISSUE OF GOOD TO
PRODUCTION 140600 NO.OF ISSUES 2500 56.24
356014

OH ALLOCATION:
HANDLING RECEIPT OF
MATERIALS 815.08
ISSUE OF GOOD TO
PRODUCTION 337.44
1152.52

PRODUCTION SET UP COST 84000

A B
PRODUCTION 40000 40000
EACH RUN 2000 5000
NO.OF RUNS 20 8 28

OAR 3000
SET-UP COST FOR B 24000
PRODUCTION FOR B 40000
SET UP COST PER UNIT 0.60

MACHINE SET UP 180000 NO:OF MACHINE SET UPS 6000

R S
PRODUCTION UNITS 80000 60000
BATCH SIZE 100 50
NO. OF BATCHES 800 1200
SET-UPS PER BATCH 3 3
TOTAL SET-UPS 2400 3600 6000

OAR=OH/COST DRIVER
OVERHEAD 180000
COST DRIVER 6000
OAR 30

OH ALLOCATION FOR S:
MACHINE SET UP 108000
PRODUCTION 60000
SET-UP COST PER UNIT 1.8

OVERHEADS COST DRIVER OAR=OH/COST DRIVER

PURCHASE ORDER
PROCESSING COST 450000 PURCHASE ORDERS 6000 75
PRODUCTION RUN SET UP
COST 180000 PRODUCTION RUN 450 400
MACHINE RUNNING COSTS 640000 MACHINE HOURS 32000 20
PURCHASE ORDER
PROCESSING COST 2250
PRODUCTION RUN SET UP
COST 400
MACHINE RUNNING COSTS 15000
TOTAL OH 17650
UNITS 500
OH PER UNIT 35.3
OH ALLOCATION:

C D
TOTAL PRODUCTION SET
UP COSTS 65000 75000
TOTAL INSPECTION COSTS 50000 30000
OTHER OVERHEAD COST 16000 80000
TOTAL OVERHEADS 131000 185000
DEMAND 1000 4000
OH PER UNIT 131 46.25