Determine the full cost of the hull using a logical and reasonable basis. Explain fully why you have… 1 answer below »

Marine Mouldings Ltd makes fibreglass hulls for small sailing boats. Part of the work involves the use of an automatic computer controlled moulding machine, but quite a lot of the work has to be carried out by hand. The flexibility of both the workers and the moulding machine means that the business can (and does) make hulls of a large variety of shapes and sizes.

During the accounting year just about to start, the business plans the following:

Direct material

£80,000

Indirect materials

£6,000

Direct labour cost

£100,000

Direct labour time

12,500 hours

Machine time

4,000 hours

Indirect labour cost

£40,000

Depreciation of machinery

£50,000

Rent and rates

£20,000

Heating and lighting

£5,000

Machine power

£5,000

General indirect costs

£4,000

The business has been asked to give a price estimate for a particular hull and to do so needs to identify the full cost for the job. It is estimated that the hull will require about 50 hours of direct labour, about 15 hours of machine time and about £320 worth of direct material.

Required:

(a) Determine the full cost of the hull using a logical and reasonable basis. Explain fully why you have adopted your particular basis.

(b) Explain the logic of ‘activity based costing’ (ABC) and discuss the extent to which ABC could be useful in determining the cost of the hull which was the subject of Requirement (a).