Assessment due date: Submission via Moodle by 11.59pm on 1st December 2025
You have recently attended CPD course in relation to Activity Based Costing and have decided to apply the principles to the company’s operations. Under the current absorption system production overhead is absorbed using machine hours. Details of the products, and other relevant information is set out below:
| Product | A | B | C | D |
| Output in units | 240 | 180 | 160 | 260 |
| Cost per unit | €/£ | €/£ | €/£ | €/£ |
| Direct Material | 40 | 50 | 30 | 60 |
| Direct Labour | 28 | 21 | 14 | 21 |
| Machine Hours per unit | 3 | 5 | 2 | 1 |
The four products are similar and are usually produced in production runs of 20 units and sold in batches of 10 units. A new set up process is required for each production run.
| €/£ | |
| Machine Department costs | 22,000 |
| Set up costs | 8,400 |
| Store Receiving costs | 11,000 |
| Quality control | 10,600 |
| Materials handling and despatch | 10,920 |
You have undertaken some preliminary work and identified the relevant cost drivers:
| ACTIVITY | COST DRIVER |
| Machine Department costs | Machine Hours |
| Set up costs | No of set ups |
| Store Receiving costs | Stores requisitions raised |
| Quality control | No of Production runs |
| Materials handling and despatch | No of sales batches |
| Product | A | B | C | D |
| Store Requisitions Raised | 15 | 18 | 10 | 12 |
Requirements:
- Calculate the unit cost under the current absorption costing system.
- Calculate the unit cost using Activity Based Costing.
In their 1988 article in the Harvard Business Review, Robin Cooper and Robert Kaplan wrote that:
Direct labour now represents a small fraction of corporate costs, while expenses covering factory support operations, marketing, distribution, engineering, and other overhead functions have exploded. But most companies still allocate these rising overhead and support costs by their diminishing direct labour base or, as with marketing and distribution costs, not at all.
These simplistic approaches are no longer justifiable – especially given the plummeting costs of information technology. (quotation taken from “Measure costs right: make the right decisions” by Robin Cooper and Robert S Kaplan, Harvard Business Review, 1988, volume 66, number 5, pages 96-103.)
Required:
Critically discuss three aspects of Cooper and Kaplan’s ideas about Activity Based Costing (ABC) in their 1988 article.
Using examples, explain how those aspects may be relevant to an organisation with which you are familiar (this could be your employer, or any business/charity/club).
Conclude with your overall assessment of the extent to which Cooper and Kaplan’s ideas would be beneficial to your chosen organisation.
Required word length of your answer is between 500 words and 1,000 words.
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