1.5 Comparing costs per driver and per unit using traditional methods and ABC
　　Traditional absorption costing charges overhead costs to products （or services） in an arbitrary way.
　　The assumption that overhead expenditure is related to direct labour hours or machine hours in the production departments is no longer realistic for the vast majority of companies.
　　This will lead to very different values of overheads absorbed per unit.
　　Illustration 3 – ABC
　　A manufacturing business produces two products, X and Y. The products are manufactured in batches. The batches differ slightly, in that different designs are used for each product, and each batch is for one particular design of a product.
　　Production data for a given period are as follows:
　　Product XProduct Y
　　Number of units produced2,0006,000
　　Production time1,000 hours1,500 hours
　　Number of batches53
　　Overhead costs relating to setting up the machinery for each batch run and getting the raw materials ready totalled $40,000.
　　This information suggests three different ways of apportioning costs:
　　Basis / driverUnitProduction hoursBatches
　　Driver volume8,0002,5008
　　OAR$5 per unit$16 per hour%5,000 per batch
　　Overheads to X2,000×5=$10,0001,000×16=$16,0005×5,000=25,000
　　Overheads to Y6,000×5=$30,0001,500×16=$24,0003×5,000=15,000
　　The selection of the cost driver can therefore make a significant difference.
　　Test your understanding 4
　　Cabal makes and sells two products, Plus and Doubleplus. The direct costs of production are $12 for one unit of Plus and $24 per unit of Doubleplus.
　　Information relating to annual production and sales is as follows:
　　PlusDoubleplus
　　Annual production and sales24,000 units24,000 units
　　Direct labour hours per unit1.01.5
　　Number of orders10140
　　Number of batches12240
　　Number of setups per batch13
　　Special parts per unit14
　　Information relating to production overhead costs is as follows:
　　Cost driverAnnual cost
　　Setup costsNumber of setups73,200
　　Special parts handlingNumber of special parts60,000
　　Other materials handlingNumber of batches63,000
　　Order handlingNumber of orders19,8000
　　Other overheads-216,000
　　Other overhead costs do not have an identifiable cost driver, and in an ABC system, these overheads would be recovered on a direct labour hours basis.
　　（a） Calculate the production cost per unit of Plus and of Doubleplus if the company uses traditional absorption costing and the overheads are recovered on a direct labour hours basis.
　?。╞） Calculate the production costs per unit of Plus and of Doubleplus if the company uses ABC.
 
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