1 (Activity based costing) Marshal Ltd. produces two models of clocks. The standard model is constructed from treated pine and sells for $1,200. The premium model has a specially shaped body constructed of specially treated timber and sells for $1,800. Both clocks require 10 hours of labour to produce, but the premium clock is manufactured by more experienced workers who are paid at a higher rate. Details of the sales, production and cost information for last year are shown below. Standard clock Sales and production units 900 Unit costs Direct materials $300 Direct labour 360 Manufacturing overhead 270 Total unit costs $930 Manufacturing overhead costs: Building occupancy Maintenance Premium clock 100 $750 480 270 $1.500 Purchasing Inspection Indirect materials Supervision Supplies Total $80,000 30,000 40,000 24,000 30,000 60,000 6,000 $270.000 The company allocates overhead costs using direct labour hours, based on the forecast production levels at the beginning of the year (10,000 labour hours). While most of Marshal's sales come from the standard clock, the managing director is concerned that the standard clock may be losing market appeal, while the demand for the premium clock appears to be increasing. He is not sure whether the present costing method used is accurate, but before he considers pricing issues, he has asked you to investigate changing to an activity-based costing system. After investigating the activities used in production, the following data is produced. Activity Cost Cost driver Quantity used Standard Premium Building occupancy $80,000 Square metres 3,000 1,000 Maintenance 30,000 Direct labour hours 9,000 1,000 Purchasing 40,000 No. of purchase orders 1,500 500 Inspection 24,000 No. of inspections 400 600 Indirect materials 30,000 No. of units 900 100 Supervision 60,000 No. of inspections 400 600 Supplies 6,000 No. of units 900 100 Total $270,000 REQUIRED (a) Calculate the cost of both clocks using activity-based costing. Show all workings. (12 Marks) (b) Assume that Marshal Ltd has a target mark-up of 30%. Discuss the changes in product cost under the ABC system and their implications for the firm's pricing policy. Make any recommendations you feel are appropriate. (4 Marks)