Accounting for Managers: Interpreting accounting information for decision-making

426 ACCOUNTING FOR MANAGERS

Assembly overheads:

Widgets 50 , 000 ×7@£0. 825 288,750

Gadgets 40 , 000 × 3 ×£0. 825 99,000

Helios 30 , 000 ×2@£0. 825 49,500

See Table A2.16.
Total profit £388,750.

Activity-based costing

See Tables A2.17 and A2.18.
Total £389,000.
The total overhead and therefore the total profit is the same under both methods
of overhead allocation (the difference is due to rounding). Each method has simply
allocated the total overheads in different ways. The activity-based approach charges
overheads to products based on the activities that are carried out in producing each
product. This demonstrates, for example, that the Helios is actually making a loss as its
high overheads compared with its low volume are not being recovered in the selling
price. Under traditional absorption costing, theHelios is being subsidized by the other
two products.

11.10
See Table A2.19.

Table A2.16

Widgets Gadgets Helios

Sales volume 50,000 40,000 30,000

Selling price 45 95 73

Direct labour and materials 32 84 65

Contribution per unit 13 11 8

Total contribution 650,000 440,000 240,000

Machining overheads 120,000 240,000 144,000

Assembly overheads 288,750 99,000 49,500

Profit 241,250 101,000 46,500

Table A2.17

Machining Assembly Set-ups Order processing Purchasing

Cost pool 357,000 318,000 26,000 156,000 84,000
Cost drivers 420,000 530,000 520 32,000 11,200
Rate .85 per m/c
hour

.60 per direct

labour hr

£50 per

set-up

£4.875 per

cust order

£7.50 per

supp order