Financial managerment Essay Example | Topics and Well Written Essays - 2500 words

Financial managerment - Essay Example Overhead Cost driver ?’000 Percentage Overheads cost Ouse Lendal Clifton Ouse Lendal Clifton Set up costs Number of production runs 350,000 30% 20% 50% 105,000 70,000 175,000 Machine related costs Number of machine hours 900,000 23% 18% 59% 211,765 158,823 529,412 Receiving costs Number of receipts 350,000 7% 10% 83% 25,000 35,000 290,000 Packing Number of deliveries 650,000 36% 14% 50% 234,000 91,000 325,000 Engineering Number of production runs 750,000 30% 20% 50% 225,000 150,000 375,000 800,765 504,823 1,694,412 Overheads Cost per Unit: Per unit Overhead cost = Overheads absorbed / Production volume Production volume (units) Overheads absorbed (?) Per Unit Overhead Cost (?) Ouse 9,000 800,765 89 Lendal 3,000 504,823 168 Clifton 1,500 1,694,412 1130 Cost Per Unit and Profit per Unit: Ouse Lendal Clifton Direct Material Cost per Unit (?) 30 40 15 Direct Labour Cost per Unit (?) 40 60 40 Overheads Cost per Unit (?) 89 168 1130 Total Per Unit Cost (?) 159 268 1185 Selling price per unit (?) 300 400 500 Total Direct Labour Cost (?) (159) (268) (1185) Profit per Unit (?) 141 132 (685) TASK 2: Traditional Full Costing: Full costing is defined as a method of costing of products in which all the manufacturing costs are included in the cost of the products being manufactured. The raw materials, direct labour involved in the production of the product and all fixed and variable products become the part of the items produced. Full costing is also termed as absorption costing. Activity Based Costing: Activity Based Costing is a costing method in which the consumption of resources are traced first and then charged to final products. However, the resources are not directly assigned to manufacturing products in this costing... Direct material cost and direct labour cost are allocated to the products in a similar way in both types of costing methods. These cost elements are allocated to the products as per their production volume. Each of these elements is allocated to each unit of the product that is manufactured. However, the overheads are absorbed in both of these products differently. In full costing method, the traditional approach is adopted while allocating costs to the product units. The approach is simple in which the resources are assigned directly to the units produced. A single volume measure is usually selected on the basis of which all overhead costs are allocated to the products. Thus, this allocation may depend upon a volume measure which may not be suitable for the purpose. Consequently, allocation of overheads may not be suitable and may reflect unrealistic cost of the products. In Activity Based Costing methodology, the overhead costs are accumulated and assigned to the activities of the production and non-production departments. The costs of these departments are then allocated to the product units.