ANZ Corporation manufactures a product available in two models: ABC, and PQR. Despite the growing popularity of the PQR model, company profits have been declining steadily, and management is beginning to think there might be a problem with their costing system. Material and Labour costs are given below: ABC PQR
Sales demand 30000 15000
Direct material cost/unit $45 $60
Direct labour cost/unit $30 $40
Production overheads are $600,000 each month.
These are absorbed on a sales demand basis.
Calculate the full production costs for ABC and PQR, using traditional costing method

The full production costs are:

ABC = $22,900,000

PQR = $1,700,000

Step-by-step explanation:

Traditional costing method is a costing method that allocates or applies overhead based on a particular metric determined by a company. It therefore add both direct cost of production and production overheads absorbed to obtain the full cost of production.

Since production overheads in this question is absorbed on demand sales basis, the full production costs for ABC and PQR can be computed as follows:

ANZ Corporation

Computation of Full Production Costs

Particulars                                      ABC                 PQR    

Sales demand                             30,000             15,000

Cost                                                   $                        $    

Direct cost:

Direct materials cost (w.1)        1,350,000           900,000

Direct labor cost (w.2)                900,000          600,000  

Total direct cost                     22,500,000        1,500,000

Indirect cost:

Production overhead (w.3)        400,000          200,000

Full production cost            22,900,000        1,700,000

Workings:

w.1: Computation of direct material cost

Direct material cost = Direct material cost per unit * Sales demand

Therefore;

ABC Direct material cost = $45 * 30,000 = $1,350,000

PQR Direct material cost = $60 * 15,000 = $900,000

w.2: Computation of direct labor cost

Direct labor cost = Direct labor cost per unit * Sales demand

Therefore;

ABC Direct material cost = $30 * 30,000 = $900,000

PQR Direct material cost = $40 * 15,000 = $600,000

w.3: Allocation of production overhead

Production overheads allocated to a model = Production overheads * (Model's Sales Demand / Total Sales demand)

Total Sales demand = 30,000 + 15,000 = 45,000

Therefore, we have:

Production overhead allocated to ABC = $600,000 * (30,000 / 45,000) = $400,000

Production overhead allocated to PQR = $600,000 * (15,000 / 45,000) = $200,000