(a) Activity based costing may supplement rather than replace a company formal cost accounting system. Do you agree? Explain in short. (b) Alex ltd manufactures high quality pens. For many years the company manufactures only one type of pen (Namely, ball point) but last year the company also began to manufacture fountain pen. The decision to begin manufacturing fountain pens was taken only after the companys marketing manager confirmed that there was a significant niche market for fountain pen and the companys cost accountant estimated that the cost of production for such pens would be much less than the selling price predicted by the marketing manager. When the fountain pen was introduced sales (In terms of both quantity and price) were higher than expected. Nevertheless, the overall profits of Alex ltd have declined steadily. As a result, the cost accountant decided that he should re examine his estimate of the cost of producing the fountain pen with particular reference to overhead costs. The following data is available for the most recent month. Direct cost of production per unit of each product:

Ballpoint pen Fountain pen Direct material cost $11.25 per unit $18.75 per unit Direct labor cost $2.5 per unit $5.00 per unit Number of units of each product produced and sold:

Ballpoint pen Fountain pen Units produced and sold 32,000 unit 4,000 unit Manufacturing overhead costs for the month: Activity cost pool Activity measure cost Machine running costs Machine hours $91,000 Stores requisitions Number of requisitions $1,89,500 Materials movements Number of movements $67,500 Production set-ups Number of batches $1,02,000 total $4,50,000

Activity levels in relation to each product: Activity Ballpoint pen

Fountain pen total Machine hours 7,500 10,000 17,500 Number of requisitions 500 500 1,000 Number of movements 325 125 450 Number of batches 50 25 75 Requirement: i. Calculate the manufacturing cost for each of the two types of pen using direct labor cost as allocation base. (Traditional costing system) ii. Calculate the activity rate using ABC system iii. Calculate the Manufacturing overhead cost per unit for each pen using ABC system. iv. Calculate the manufacturing cost for each pen using ABC system