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.
