AASB 420 1. Tiger Co operates an activity-based costing system and has forecast the following information for next year

AASB 420

1.  Tiger Co operates an activity-based costing system and has forecast the following information for next year.

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Cost Pool                                          Cost           Cost Driver              Number of Drivers

Production set-ups                         £105,000       Set-ups                                      300

Product testing                              £300,000       Tests                                      1,500

Component supply and storage        £25,000       Component orders                     500

Customer orders and delivery         £112,500       Customer orders                     1,000

General fixed overheads such as lighting and heating, which cannot be linked to any specific activity, are expected to be £900,000 and these overheads are absorbed on a direct labour hour basis. Total direct labour hours for next year are expected to be 300,000 hours.

Tiger Co expects orders for Product AB1 next year to be 100 orders of 60 units per order and 60 orders of 50 units per order. The company holds no inventories of Product AB1 and will need to produce the order requirement in production runs of 900 units. One order for components is placed prior to each production run. Four tests are made during each production run to ensure that quality standards are maintained. The following additional cost and profit information relates to product AB!

Component cost:                      £1.00 per unit

Direct labour:                           10 minutes per unit at £7.80 per hour

Profit mark up:                         40% of total unit cost

Required:

(a)      Calculate the activity-based recovery rates for each cost pool.

(b)     Calculate the total unit cost and selling price of Product ZT3.

(c)     Discuss the reasons why activity-based costing may be preferred to traditional absorption costing in the modern manufacturing environment.

(d)       Explain the approach Tiger Co has chosen for it’s method of pricing and the reasons

           why it may have done so                                                                            

(e)        Identify two other methods of deciding upon a selling price and explain what their    

          their advantages and disadvantages are

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