Hoffman Ltd makes only two types of portable cooking stove, the Lightweight (LW) and the Megarange (MR). Last year it produced 4,500 LWs and 500 MRs. The direct materials cost £3.00 for one LW and £10.00 for one MR. The assembly workers who put the stoves together are all paid at the same rate of £6.30 an hour. When LWs are being produced each operative assembles nine stoves an hour and when MRs are being produced each operative assembles seven stoves an hour. This is the only labour that Hoffman classes as ‘direct labour’. The factory uses automated machinery to manufacture the components which are common to both stoves. The other components are bought in. Each stove uses 15 machine hours in its construction.  For some time now, the company has been considering the introduction of activity-based costing. It has decided to recost last year’s production using this method so it can compare costs with those under its current absorption costing system. The current overhead absorption rate is based on the number of machine hours. Last year’s  production activities have been analysed as follows: Activity Cost driver - Activity cost pool (£) Purchasing - Purchase order 20,000 Training - Training hour 1,000 Setting up machines - No. of set-ups 2,250 Running machines - Machine hours 14,250 Total £37,500 The analysis also quantified the number of cost drivers caused by each stove: Activity - No. of cost driver caused by LWs - No. of cost drivers caused by MRs Purchasing - 360 - 40 Training - 20 - 30 Setting up machines - 60 - 30 Running machines - 67,500 - 7,500   Questions 1. Calculate the absorption cost for each type of stove.  2. Calculate the activity-based cost for each type of stove

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Hoffman Ltd makes only two types of portable cooking stove, the Lightweight (LW) and the Megarange (MR). Last year it produced 4,500 LWs and 500 MRs. The direct materials cost £3.00 for one LW and £10.00 for one MR. The assembly workers who put the stoves together are all paid at the same rate of £6.30 an hour. When LWs are being produced each operative assembles nine stoves an hour and when MRs are being produced each operative assembles seven stoves an hour. This is the only labour that Hoffman classes as ‘direct labour’. The factory uses automated machinery to manufacture the components which are common to both stoves. The other components are bought in. Each stove uses 15 machine hours in its construction. 

For some time now, the company has been considering the introduction of activity-based costing. It has decided to recost last year’s production using this method so it can compare costs with those under its current absorption costing system. The current overhead absorption rate is based on the number of machine hours. Last year’s 
production activities have been analysed as follows:

Activity Cost driver - Activity cost pool (£)
Purchasing - Purchase order 20,000
Training - Training hour 1,000
Setting up machines - No. of set-ups 2,250
Running machines - Machine hours 14,250
Total £37,500

The analysis also quantified the number of cost drivers caused by each stove:

Activity - No. of cost driver caused by LWs - No. of cost drivers caused by MRs
Purchasing - 360 - 40
Training - 20 - 30
Setting up machines - 60 - 30
Running machines - 67,500 - 7,500

 

Questions
1. Calculate the absorption cost for each type of stove. 
2. Calculate the activity-based cost for each type of stove.

Hoffman Ltd makes only two types of portable cooking stove, the Lightweight (LW)
and the Megarange (MR). Last year it produced 4,500 LWS and 500 MRs. The direct
materials cost £3.00 for one LW and £10.00 for one MR. The assembly workers who
put the stoves together are all paid at the same rate of £6.30 an hour. When LWs are
being produced each operative assembles nine stoves an hour and when MRs are
being produced each operative assembles seven stoves an hour. This is the only
labour that Hoffman classes as 'direct labour'. The factory uses automated machinery
to manufacture the components which are common to both stoves. The other
components are bought in. Each stove uses 15 machine hours in its construction.
For some time now, the company has been considering the introduction of activity-
based costing. It has decided to recost last year's production using this method so it
can compare costs with those under its current absorption costing system. The current
overhead absorption rate is based on the number of machine hours. Last year's
production activities have been analysed as follows:
Activity
Purchasing
Training
Setting up machines
Running machines
Cost driver
Purchase order
Training hour
No. of set-ups
Machine hours
Activity
14,250
Total £37,500
The analysis also quantified the number of cost drivers caused by each stove:
No. of cost
drivers caused
by MRs
Activity cost pool (£)
20,000
1,000
2,250
Purchasing
Training
Setting up machines
Running machines
No. of cost driver
caused by LWs
360
20
60
67,500
Questions
1. Calculate the absorption cost for each type of stove.
2. Calculate the activity-based cost for each type of stove.
40
30
30
7,500
Transcribed Image Text:Hoffman Ltd makes only two types of portable cooking stove, the Lightweight (LW) and the Megarange (MR). Last year it produced 4,500 LWS and 500 MRs. The direct materials cost £3.00 for one LW and £10.00 for one MR. The assembly workers who put the stoves together are all paid at the same rate of £6.30 an hour. When LWs are being produced each operative assembles nine stoves an hour and when MRs are being produced each operative assembles seven stoves an hour. This is the only labour that Hoffman classes as 'direct labour'. The factory uses automated machinery to manufacture the components which are common to both stoves. The other components are bought in. Each stove uses 15 machine hours in its construction. For some time now, the company has been considering the introduction of activity- based costing. It has decided to recost last year's production using this method so it can compare costs with those under its current absorption costing system. The current overhead absorption rate is based on the number of machine hours. Last year's production activities have been analysed as follows: Activity Purchasing Training Setting up machines Running machines Cost driver Purchase order Training hour No. of set-ups Machine hours Activity 14,250 Total £37,500 The analysis also quantified the number of cost drivers caused by each stove: No. of cost drivers caused by MRs Activity cost pool (£) 20,000 1,000 2,250 Purchasing Training Setting up machines Running machines No. of cost driver caused by LWs 360 20 60 67,500 Questions 1. Calculate the absorption cost for each type of stove. 2. Calculate the activity-based cost for each type of stove. 40 30 30 7,500
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