Q1. Bilko Limited

Bilko Limited manufactures three products: GX, TY, and KZ. They all use the same resources but in different
quantities – see budgeted data below:
The budgeted production overhead costs for the financial period amount to £400,000. Currently the practice
is to absorb overhead costs into product costs using an absorption rate based on direct labour hours.
Following this practice, the production overhead cost attributed to each product unit is:
Product GX £32
Product TY £64
Product KZ £48
GX TY KZ
Planned production units i.e. budgeted 1,500 2,500 4,000
Direct labour hours per production unit (LHrs) 2 4 3
Machine hours per production unit (Mhrs) 3 2 3
Production batch size 50 100 500
Machine setups per production batch (Setups 2 3 1
Purchase orders per batch 4 4 6
Material movement per batch 10 5 4

Assessment Brief – Newcastle Business School
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The production director of Bilko Ltd, following a short management course at Newcastle Business School,
has recommended Activity Based Costing (ABC) approach to production overhead allocation to the
management. The production department have identified the following cost drivers and related cost pools:
There is additional £80,000 of overhead costs, caused by several different factors and activities that are
mainly labour related and are to be attributed to products on labour hour basis.
Required:
A. Calculate cost driver rates and the production overhead cost attributed to each product unit using an
activity-based approach.
(13 marks)
B. From management and costing perspectives, briefly discuss why the production director suggested
the application of ABC approach to product costing as opposed to the traditional practice in the
organisation.
(3 marks)
C. Briefly discuss four major implementation challenges that a company could face at the introduction
phase of an ABC programme.
(4 marks)
Total = 20 marks