assigning overhead in ABC costing method

	Phone	Tablet	Computer	Total
Material cost per unit	90	140	315
Direct labor hours per unit	2	2.5	4
Budgeted units	1,500,000	900,000	1,200,000
DLHs	3,000,000	2,250,000	4,800,000	10,050,000
				£7.96	< ---  Overhead rate for DLHs
Labor cost per hour	8
Overhead costs per annum
Utilities	£20,000,000.00
Rent	£15,000,000.00
Audit and legal	£5,000,000.00
Administrative staff	£40,000,000.00
Total	£80,000,000.00
Overheads	Phone	Tablet	Computer	Total
Utilities	£8,000,000	£5,000,000	£7,000,000	£20,000,000
Rent	£8,250,000	£2,250,000	£4,500,000	£15,000,000
Audit and legal	£2,900,000	£1,250,000	£850,000	£5,000,000
Administrative staff	£23,200,000	£6,000,000	£10,800,000	£40,000,000
	£42,350,000	£14,500,000	£23,150,000	£80,000,000
Question 1:	Phone	Tablet	Computer
Full costing sales price	£170.69	£233.87	£435.67
Material cost	£90.00	£140.00	£315.00
Direct Labor cost	£16.00	£20.00	£32.00
Overhead based on DLHs	£15.92	£19.90	£31.84
Profit	£48.77	£53.97	£56.83
profit percentage	28.57%	23.08%	13.04%
Question 2 Full costing sales price	£187.93	£228.94	£421.24
Material cost	£90.00	£140.00	£315.00
Direct Labor cost	£16.00	£20.00	£32.00
Overhead based on ABC	£28.23	£16.11	£19.29
Profit	£53.69	£52.83	£54.95
profit percentage	28.57%	23.08%	13.04%

Question 3

From the single cost driver (traditional) method adopted in the analysis above, it can be seen that the overhead is actually assigned to products based on the direct labour hour that has been utilized, thus spreading more overhead to computers as a result of their higher labour usage. In any case, it can also be seen from the table down the left that phones actually make use of and incur more overheads than computers in the process. By adopting ABC as the accounting method for allocating overhead based on the actual resources that has been consumed in the process of delivery, the phones will then be absorbing a greater deal of overhead the more. Thus, it is recommended that the company should make use of ABC as the accounting method in order for the product to absorb the actual overhead of the resources they have incurred in the course of production. This is the best decision in terms of viewing it form the change it will inflict on profit with change in the production of the products.

It is also important to note that the suggested pricing strategy of adding a certain perfect for each product line will actually work so long as the price that has been derived is in line with the range that the market offers for such products under the conditions of increased competition and substitute products. In any case, it should also be noted that the decision to allocate overhead under the standards of ABC has considerably raised the phone prices, which means that it might not be so much possible to retain the same price level if a cost-plus-profit pricing policy is adopted. Additionally, if the computers were performing well under the previous prices, the company might desire to maintain such prices and enjoy and even greater percentage of profit from that product as a compensation for the potentialities that might arise from the need to reduce the overall profit level on phones.