Question 12.9: The accountant at Modern Producers Ltd (see Example 12.8) ha...
The accountant at Modern Producers Ltd (see Example 12.8) has estimated that the costs of running the finished goods store for next year will be $90,000. This will be the amount allocated to the ‘finished goods stores’ cost pool.
It is estimated that each unit of product A will spend an average of one week in the stores before being sold. With product B, the equivalent period is four weeks. Both products are of roughly similar size and have very similar storage needs. It is felt, therefore, that the period spent in the stores (‘product weeks’) is the cost driver.
Next year, 50,000 units of product A and 25,000 of product B are expected to pass through the stores. The estimated total usage of the cost driver will be the total number of product weeks that the products will be in the stores. For next year, this will be:
| Product A | 50,000 × 1 week | = | 50,000 |
| Product B | 25,000 × 4 week | = | 100,000 |
| 150,000 |
The cost per unit of the cost driver is the total cost of the stores divided by the number of ‘product weeks’ as calculated above. This is:
$90,000/150,000 = $0.60 per product week.
To determine the cost to be attached to a particular unit product, the figure of $0.60 must be multiplied by the number of ‘product weeks’ that a product stays in the finished goods store. Thus, each unit of product A will be charged with $0.60 for finished stores costs and each unit of product B with $2.40(i.e. $0.60 × 4).