Management accounting - Assignment Example

These total overhead costs are then divided by the total number of labour hours to obtain the budgeted factory over head rate. That rate is multiplied by the number of hours to complete one unit of Vivaldehyde and Kathanol in order to determine Factory Overhead Rate per unit of Vivaldehyde and Kathanol. These FOH rates are then multiplied by the total number of units of both Vivaldehyde and Kathanol to obtain Total Factory Overhead costs. Similarly, total number of units produced was then multiplied by direct material cost per unit and direct labour cost per unit in order to calculate total direct material cost and total labour cost respectively.

Per unit direct material cost, per unit direct labour cost and per unit factory overhead cost were then added to get the total per unit cost of both products. 40% mark-up was then added on the total per unit costs of both the products in order to arrive at the selling prices for both of the products. Activity Based Costing is the technique that is applied due to the lack of appropriateness of the traditional Absorption Costing. For Activity Based Costing, in the first step the relevant cost drivers and their total activity levels are identified which cause the factory overheads to incur.

Total factory overhead costs of every department are then divided by the relevant activity level of each cost drivers to find out the activity rates. Those activity rates are then multiplied by the exact level of activity consumed by each product to obtain the factory overhead cost incurred by the each product. In this way, the factory overhead rate is calculated. Factory overhead rate along with direct material per unit as well as direct labour per unit are then added up to reach at the total cost per unit of both Vivaldehyde and Kathanol.

Total Factory Overhead Costs of both products are having different values in Activity Based Costing than those of Absorption Cost due to