Amazon ltd produces three products; A, B, C and D using the same processing plant. The following information relates to the company:

Product A B C D

Units produced 2,000 20,000 2,400 28,000

Material cost per unit (sh) 20 20 64 68

Labour hours per unit 2 2 8 6

Machine hours per unit 1 1 4 6

Labour cost per unit (sh) 12 12 48 36

The cost accountant analysed the production overheads recorded under the following headings:

Overhead cost element Amount (sh)

Setup costs 17,420,000

Factory costs (machine oriented activity) 149,696,000

Cost of ordering materials 7,680,000

Materials handling costs 30,320,000

Administration cost for spare parts 34,400,000

Investigations into the production overhead activities for the period reveal the following:

Product A B C D

Number of set-ups 4 24 8 32

Number of material orders 4 32 4 32

Number of times material

Was handled 8 40 12 48

Number of spare parts used 8 20 4 16

Required:

Unit cost per product using the machine hour rate

Unit cost per product using the activity based costing

Outline the shortfalls of activity based costing