1) Discuss whether you agree with direct labour hours being used as a base to apply manufacturing overheads. Should you not agree, recommend a more appropriate traditional base for the Government to use?

2) The most critical step in activity-based costing is identifying cost drivers. Define a cost driver and briefly discuss whether you agree with this statement or not

The finance team have just arrived from an executive course and have learnt that activity- based costing is more accurate than applying overheads using direct labour hours as they have done in the past. They have therefore decided that this should be investigated before the arrival of the new machine. The following fixed overhead cost information was compiled by the governments costing analyst: Cost Pool Ordering Material handling Processing Packaging Cost R330 000 R655 000 R1 545 000 R770 000 R3 300 000 Cost driver Purchase Orders Number of set-ups Processing hours Packaging Hours 12 Planned production and sales Number of setups Purchase order size Processing hours Packaging time License cards 80 000 cards 32 setups 20 000 cards 15 000 hours 2 400 hours The budget for the coming year includes fixed production overhead costs of R3 300 000. Production overheads are applied using direct labour hours at the moment. The expected direct labour cost is R2 500 000 and the total budgeted direct labour hours are 18 334 hours. The above-mentioned labour costs are considered a variable cost. The license cards cost R25 per card. Each card requires six minutes of labour. Packaging is R5 per card. Additional information required In addition to the license cards, the department offers temporary license cards: Planned production and sales Number of setups Purchase order size Processing hours Packaging time Temporary License cards 12 000 cards 25 setups 7 000 cards 8 000 hours 800 hours