Stodge Limited started business at the start of 2012 producing biscuits. Its only product for 201…

Stodge Limited started business at the start of 2012 producing biscuits. Its only product for 2012 and 2013 was called Weightgainer. It was manufactured and packaged in 1 kg units. A traditional and conventional overhead recovery costing system was used. Direct materials and direct manufacturing labour were the only direct cost items, both being variable costs. Manufacturing overhead was charged to production using a unit of output basis. A second type of biscuit, Weightloser, was brought into production at the start of 2014. This was also manufactured and packaged in 1 kg units. The production process for Weightloser is different from that of Weightgainer, the ingredients used are more expensive, more direct manufacturing labour time is required, and the manufacturing process is more complex. In 2014, Stodge Limited continued to use its traditional overhead recovery costing system. Direct materials costs in 2014 were pound 0.60 per kg of Weightgainer and pound 0.90 per kg of Weightloser. Direct manufacturing labour cost in 2014 was pound 0.14 per kg of Weightgainer and pound 0.20 per kg of Weightloser. The budgeted manufacturing overhead for 2014 comprised power pound 60, 800, insurance pound 30,000, cleaning pound 20,000, and general manufacturing costs pound 100,000. During 2014, Stodge Limited’s sales team reported greater-than-expected sales of Weightloser and less-than-expected sales of Weightgainer. The budgeted and actual sales volume for 2014 were: At the end of 2014, Stodge Limited, decided to investigate how the use of an activity based costing (ABC) system would affect the product cost numbers. After investigation, five activity areas were identified as drawing upon fixed overheads spend. The activity areas, the relevant drivers, the 2014 budgeted rates, and the driver units used per kilogram of each cake are as follows: a) Calculate the 2014 unit product cost Weightgainer and Weightloser using the traditional absorption costing system used by the company. b) Calculate the 2014 unit product cost of Weightgainer and Weightloser under the activity-based normal costing system. c) Mangers and accountants in favour of ABC emphasise that ABC overcomes the problems associated with traditional, conventional overhead recovery systems. Identify and explain the nature of the benefits and disadvantages of each system.

 

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