Rambo company Ltd. is a manufacturer of chocolates. It was started after John Rambo retired from the Army and decided to make chocolates in the year 1972. When it was started it was manufacturing only Milk dairy chocolates and it used a traditional cost accounting system where all the overheads were collected together and allocated to the products based on direct labour hour. Even today same accounting system is followed and the price of the product is determined as follows.

Milk Dairy	Standard	Belgium
Direct Materials	30g at 500 per Kg = Rs. 15	30g at 700 per kg = Rs. 21	30g at 1000 per kg = Rs. 30
Diret Labour	2 min at 60 per hour = Rs. 2	2 min at Rs 60 per hour = Rs. 2	3 min at Rs 60 per hour = Rs. 3
Prime Cost	Rs. 17	Rs. 23	Rs. 33
Overheads
@ Rs. 300 per hour	Rs. 10	Rs.10	Rs. 15
Cost of Production	Rs. 27	Rs. 33	Rs. 48
Selling Price	Rs 30	Rs. 40	Rs. 65
Units Sold	10Million	5 Million	1 million

Many new companies have started to enter into the chocolate business and Rambo expects the price competition to go up incase of Milk Dairy chocolates. Hence he has invited you to study the cost structure of the company so that the prices of the product are determined optimally. You have collected following information pertaining to the costs

Overheads cost for Rambo Company Ltd.

Overheads
Depreciation on machinery	100,000,000
Parts admin	3,000,000
Handling and receiving	10,000,000
Total Set up time	10,000,000
Research and Development	10,000,000
Inspection and quality control	20,000,000
Miscellaneous Manufacturing	12,000,000
Total	165,000,000

Overhead costs AND its Cost drivers and its utilization by different chocolates

Overhead	Cost driver for the overhead	Utilization of the cost driver
Milk Dairy	Standard	Belgium
Depreciation on machinery	Machine hour	45%	40%	15%
Parts admininstartion	Usage of Computer system	40%	40%	20%
Handling and receiving	Production Runs	40%	40%	20%
Total Set up time	Production Runs	40%	40%	20%
Research and Development	Usage of computer system	40%	40%	20%
Inspection and quality control	Quality hours	30%	35%	35%
Miscellaneous Manufacturing	Machine hour	45%	40%	15%

1. a. You are required to allocate the overhead costs based on the ABC using the cost drivers given above
2. b. Why do you think the cost allocated based on the traditional costing and the activity based costing are different
3. c. Based on the above analysis what are the strategies you propose for Rambo Company to improve its profit