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Hitau Ltd has a single production process for which the following costs have been estimated for the period ending 31 December 2021:

Material receipt and inspection cost

15,600

Power cost

19,500

Material handling cost

13,650

Three products - X, Y and Z are produced by workers who perform a number of operations on material blanks using hand held electrically powered drills. The workers have a wage rate of 9 per hour.

The following budgeted information has been obtained for the period ending 31 December 2021:

Product X

Product Y

Product Z

Production quantity (units)

2,000

1,500

800

Batches of material

10

5

16

Data per product unit:

Direct material (sq. metres)

4

6

3

Direct material ()

5

3

6

Direct labour (minutes)

24

40

60

Number of power drill operations

6

3

2

Overhead costs for material receipt and inspection, process power and material handling are presently each absorbed by product units using rates per direct labour hour.

An activity based costing investigation has revealed that the cost drivers for the overhead costs are as follows:

Cost

Cost Driver

Material receipt and inspection = Number of batches of material

Process power = Number of power drill operations

Material handling = Quantity of material (sq. metres) handled

Requirements for question 1:

a) Prepare a summary which shows the budgeted product cost per unit for each of the products X, Y and Z for the period ending 31 December 2021 detailing the unit costs for each cost element:

1.Using the existing method for the absorption of overhead costs

2.Using an approach which recognises the cost drivers revealed in the activity based costing investigation

b) Explain the relevance of cost drivers in activity based costing. Make use of figures from the summary statement prepared in (a) to illustrate your answer (10 marks)

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