ACTIVITY BASED COSTING 1. Triple Limited makes three types of gold watch the Diva (D), the Classic (C) and the Poser (P). A traditional product costing system is used at present; although an activity-based costing (ABC) system is being considered. Details of the three products for a typical period are: Product D Product C Product P Costs relating to set-ups Costs relating to machinery Costs relating to materials handling Costs relating to inspection Total production overhead Labour hours Product D Product C Product P Hours per unit 1 1 Number of Set ups 75 115 480 670 Machine hours 20 15 30 100 1 1 3 Total production overheads are $654,500 and further analysis shows that the total production overheads can be divided as follows: - Materials Cost per unit ($) 20 12 25 The following total activity volumes are associated with each product line for the period as a whole: Number of movements Number of of materials inspections 12 150 21 180 87 670 120 1.000 Production Units 750 1.250 7,000 Direct labour costs $6 per hour and production overheads are absorbed on a machine hour basis. The overhead absorption rate for the period is $28 per machine hour Required: (a) Calculate the cost per unit for each product using traditional methods, absorbing overheads on the basis of machine hours. (b) Calculate the cost per unit for each product using ABC principles (work to two decimal places). (c) Explain why costs per unit calculated under ABC are often very different to costs per unit calculated under more traditional methods. Use the information from Triple Limited to illustrate. (4 marks) (d) Discuss the implications of a switch to ABC on pricing and profitability (6 marks)