2. The following comparative data is provided for the Laventura Boating Company. It is stated that the company has more accurate product cost information using activity based costing to allocate overhead.

a. Describe the differences in profitability resulting from the two costing approaches. (4 marks)

b. Explain why the overhead cost is so different using activity-based costing. (2 marks)

c. List 2 possible decisions that management might take due to the significant change in relative profitability of the two types of boats resulting from the use of ABC. (2 marks)

d. Activity-based costing undoubtedly provides better cost information than most traditional costing methods, such as plant wide and department allocation methods. However, ABC has its limitations. What are the advantages and disadvantages of using activity-based costing? (6 marks)

Laventura Boating Company

(Direct labour hours as allocation base)

FISHING BOAT LUXURY BOAT

$ $

Direct materials 32 000 41 600

Direct labour 19 200 24 000

Overhead* 40 960 51 200

Total product cost per unit (a) 92 160 116 800

Sales price (b) 102 400 144 000

Profit= (b)-(a) 10 240 27 200

Activity-Based Costing

(several different allocation bases)

FISHING BOAT LUXURY BOAT

$ $

Direct materials 32 000 41 600

Direct labour 19 200 24 000

Overhead* 32 128 95 360

Total product cost per unit (a) 83 328 160 960

Sales price (b) 102 400 144 000

Profit= (b)-(a) 19 072 (16 960)