Alendar Ltd manufacturers two types of phone handsets, A$01$ and D$01,$ and sells these phones in Africa. Due to increased demand,Alendar Ltd decided to invest heavily in new manufacturing technology which led to a reduction in its labour force.

Historically, Alendar Ltd absorbs all its fixed overhead costs on the basis of machine hours using a predetermind rate. Currently, Alendar Ltd determines its prices by adding $20\%$ markup to the total cost of the products. The Management Accountant is concerned about the selling prices derived under the tradition absorption costing basis. He thinks that phones are either under$-$priced or overpriced on this basis.Consequently, he has recommended to the to the board f Alendar Ltd to move to the Activity Based Costing $[$ABC$]$system$.$Some members of the board were not very comfortableon this proposal and requessted for a thorooogh explanaion of the ABC system.

The following financial and operating data for $2021$ is available:

Phone A$01$ Phone D$01$ Total

Variable cost pre unit$[$K$]1,4501,254$

Total costs$[$K$]42,387,120$

Bugeted production units $7,96810,160$

Machine hours per unit $1\mathrm{.}5$ hours $1\mathrm{.}8$ hours

An ABC study by the Management Accountant revealed that the fixed overheads are driven by factors other than machine hours.The results of the study is tabulated below:

Activity cost pool Fixed overhead$[\%$ allocation$]$ Cost driver

Set up costs $70\%$ numberof setups

Stores handling costs $20\%$ number of materialhandling

Customer invoicing costs $10\%$ Number of customer orders

The study also revealed the following activity volumes for each of the phones for the year $2021.$

Type of Number of setofsetups Number of machine handling Number of customer order

phones

A$011,5003,1003,930$

D$011,0003,10011,790$

$[$a$]$ Explain the concept of activity based costing and discuss its benefits problems.

$[$b$]$ Calculate the selling prices per unit for phone A$01$ and D$01$ using:

$1]$The total absorption cost plus basis

$2]$ The activity based costing plus basis

$[$c$]$ Evaluate the results of the calculated prices in $[$b$]$above$.$