ABC profitability analysis GH produces three models of speedboat for sale to the retail market. GH currently operates a standard absorption costing system. Budgeting information for next year is given below:

GH is considering changing to an activity-based costing system. The main activities and their associated cost drivers and overhead cost have been identified as follows:

The analysis also revealed the following information:

The machines are set up for each production run of each model.
Required:

(a) Calculate the total gross profit for each model of speedboat:
(i) using the current absorption costing system;
(4 marks)
(ii) using the proposed activity-based costing system. .
(12 marks)

(b) Explain why an activity-based costing system may produce more accurate product costs than a traditional absorption costing system.
(3 marks)

(c) Explain the possible other benefits to the company of introducing an activitybased costing system. You should use the figures calculated in part

(a) to illustrate your answer.
(6 marks)
CIMA P1 Performance Operations

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Superior Deluxe Ultra Model of speedboat ($000) ($000) ($000) Total ($000) Sales 54000 86400 102000 242 400 Direct material 17600 27400 40200 85200 Direct labour 10700 13400 16600 40700 Production overhead 69 600 Gross profit 46900 Superior Deluxe Ultra Production / sales (number of boats) 1000 1200 800 Machine hours per boat 100 200 300 The production overhead cost is absorbed using a machine hour rate.