Parfums de Paris AG has a factory in France producing two aromatherapy oils. Sweet Pea is intended for the younger market and Allure is aimed at the more mature customer. The most significant costs incurred by the company relate to the packaging and advertising of the two products. The chief accountant has attended a seminar on ABC and has decided that it would be beneficial to implement it. The following information relates to the production in the current period:

Required

(a) Calculate the cost per unit for each of the two products.

(b) Discuss the decision of the chief accountant to implement the system in the context of the available information.

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Sweet Pea Allure Number of litres produced 20,000 4,000 Number of purchasing orders 150 60 Quality inspection hours 1,000 750 Number of batches of materials 2,000 1,000 Cost of direct materials 35,000 12,000 Cost of direct labour 25,000 16,000 Activity The budgeted cost pools and drivers for the financial year are as follows: Cost driver Predetermined annual overhead Predetermined cost driver volume Predetermined cost driver rate Purchasing No. of orders placed 180,000 15,000 orders. 12 per order Quality control No. of inspection hours 50,000 12,500 hours 4 per hour Material handling Batches of materials 20,000 10,000 hours 2 per hour