Abc Case Study

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Microdisk plc Microdisk plc assembles hi-fi equipment in the UK for its sole customer, a Japanese manufacturer, Mitsusonyo. Prices and sales volumes are negotiated under annual contracts. Microdisk plc’s management expects the company will gain other customers in the near future. Over recent years the assembly process of Microdisk plc has become increasingly advanced with significant investment in high technology machinery and corresponding reductions in the size of the labour force. The method of identifying an apportioning manufacturing costs, however, has not changed for some significant time and the directors have called a meeting to examine the adequacy of the company’s costing procedures with a view to introducing activity based costing (ABC). For the meeting, you, the company accountant, have assembled the following figures. All figures are annual totals unless it is specified that they are unit prices or costs. Output (units) Direct Labour hours CD Players Radio cassettes Digital cassettes In preparing this table, you have identified three activities which appeared to generate overhead costs: purchase ordering i.e. the administration and control of the acquisition of raw materials; set ups i.e. the resetting of the machinery to change the type of product made in subsequent production runs; and production runs i.e. making batches of products. Total overhead costs of £10,800,000 were analysed in relation to these activities as follows: £ Purchase ordering Set ups Production runs All direct labour is paid at £9 per hour At a recent board meeting, the four directors commented as follows: 2,400,000 3,200,000 5,200,000 20,000 10,000 2,000 10 200 200 60 90,000 5,000 4,000 30 300 60 30 90,000 15,000 Quantity of purchases orders 6,000 40 Quantity of set ups Quantity of runs 500 150 Selling price Raw (£ material cost per unit) 40 (£ production per unit) The

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