Question: Your company Twilight Ltd makes two products; the Wolf and the Vamp. The market is incredibly competitive, and Twilight has to conduct market analysis of prices in order to stay competitive.

Your company Twilight Ltd makes two products; the Wolf and the Vamp. The market is incredibly competitive, and Twilight has to conduct market analysis of prices in order to stay competitive.

This year it plans to make 1,000 of the Wolf and 1,500 of the Vamp. Previous years the company has used absorption costing on a simplistic blanket rate apportioning on labour hours the overheads: The overhead absorption rate per unit for Wolf £26.10 and Vamp £32.63. Direct cost for Wolf was £100 per unit and Vamp £80 per unit.

This year you, as the management accountant and your team have worked on preparing an analysis of the overheads using activity based costing.

You have prepared the information below:

Overheads

The company incurs £75,000 production overheads during the year.

Each Wolf takes 3 hours of direct labour in total, and 1.5 machine hours to make.

Each Vamp takes 3.75 hours of direct labour in total, and 2.25 machine hours to make.

Cost driver Information

Activity Based Costing Analysis (appendix 1)

Overhead per Activity:

Materials handling   £18000/100= £180 per move

Job scheduling = £12,000/100 = £120 per job

Machine related = £33,000/4875= £6.77 per hour

Quality control inspections = £12,0000/50 = £240 per inspection

Overhead per Product

Required:

You are the management accountant at Twilight. The senior management accountant Ray Briggs, who happens to be your line manager, has reviewed the work above which you prepared recently. Ray sends you the following email which he is expecting a response too.

EMAIL

To: Management Accounting

Subject: Activity Based Costing Analysis within Twilight

Dear Management Accounting,

I hope you are well and have had a nice break. I have finally had time to review the work you have prepared reviewing the use of ABC within Twilight. I have a few requirements I need you to address in an email please:

1. Explain briefly how the analysis for ABC, refer to appendix 1, was created referring to the numbers included.
2. Compare the full production costs for Wolf and Vamp using the simplistic absorption costing basis versus ABC.
3. Discuss why the costs are different.
4. Recommend whether you would use ABC at Twilight: briefly referring to the advantages and disadvantages of using ABC referring to Twilight specifically. I am not interested in a generic list.