[Solution]Assume that the Balearic company has only one overhead

Assume that the Balearic company has only one overhead _cost centre or cost pool. It currently operates a traditional costing system using direct labour hours…

Assume that the Balearic company has only one overhead _cost centre or cost pool. It currently operates a traditional costing system using direct labour hours to allocate overheads to products. The company produces several products, two of which are products HV and LV. Product HV is made in high volumes whereas product LV is made in low volumes. Product HV consumes 30% of the direct labour hours and product LV consumes only 5%. Because of the high volume production product HV can be made in large production batches but the irregular and low level of demand for product LV requires it to be made in small batches. A detailed investigation indicates that the number of batches processed causes the demand for overhead resources. The traditional system is therefore replaced with an ABC system using the number of batches processed as the cost driver. You ascertain that each product accounts for 15% of the batches processed during the period and the overheads assigned to the cost centre that fluctuate in the long term according to the demand for them amount to El million. The direct costs and sales revenues assigned to the products are as follows:Product HVProduct LV (L)(£)(£)Direct costs31000040000Sales revenues600000150000Show the product profitability analysis for products HV and LV using the traditional and ABC systems.

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