ABSORPTION COSTING AND ACTIVITY BASED COSTING Question 1: Cabal Cabal makes and sells two products, Plus and Doubleplus. The direct costs of production are $12 for one unit of Plus and $24 per unit of Doubleplus. Information relating to annual production and sales is as follows: Plus Doubleplus Annual production and sales 24,000 units 24.000 units Direct labour hours per unit 1.0 1.5 Number of orders 10 140 Number of batches 12 240 Number of setups per batch 1 3 Special parts per unit Information relating to production overhead costs is as follows: Cost driver Annual cost Setup costs Number of setups 73,200 Special parts handling Number of special parts 60,000 Other materials handling Number of batches 63,000 Order handling Number of orders 19,800 Other overheads 216,000 432,000 Other overhead costs do not have an identifiable cost driver, and in an ABC system, these overheads would be recovered on a direct labour hours basis. a) Calculate the production cost per unit of Plus and of Doubleplus if the company uses traditional absorption costing and the overheads are recovered on a direct labour hours basis. b) Calculate the production cost per unit of Plus and of Doubleplus if the company uses ABC. c) Comment on the reasons for the differences in the production cost per unit between the two methods. d) What are the implications for management of using an ABC system instead of an absorption costing system