Application of Activity-Based Costing Nina Audrey started Nina Interiors, a niche furniture brand, 10 years ago. She ran the business as a sole proprietorship. While she has 50 skilled carpenters and 5 sales people on her payroll, she has been taking care of the accounting by herself. Now, she intends to offer 40% of the ownership to public in next couple years and is willing to make changes and has hired Tracy as a management accountant to organize and improve the accounting systems. Nina Interior's total budgeted manufacturing overheads cost for the current year is Ugx 81,240,000 and budgeted total labor hours are 20,000. Alison the financial accountant has been applying traditional costing method during the whole 10 years period. Nina Interior's sofas includes the 2-set, 3-set and 6-set options. State House recently placed an order for 150 units of the 6-set type. The order is expected to be delivered in one-month time. Since it is a customized order, State House will be billed at cost plus 25%. Tracy is not a fan of traditional costing system. She believes that the benefits of activity-based costing system exceeds its costs, so Tracy has sat down with Aaron Mason, the chief engineer, to identify the activities which the firm undertakes in its sofa division. Next, Tracy calculated the total cost that goes into each activity, identified the cost driver that is most relevant to each activity and calculated the activity rates. The results are summarized below: Activity Amount (Ugx) Production of components 20,310,000 Relevant Cost Driver Machine hours Activity level 25,000 Assembly of components 15,200,000 Number of labor hours 20,000 Packaging 2,130,000 Units 5,000 Shipping 6,000,000 Units 5,000 Setup costs 3,4000,000 Number of setups 240 Designing 1,200,000 Designer hours 1,000 Product testing 2,400,000 Testing hours 500 Once the order was ready for packaging, Alison gave you a summary of total cost incurred, and a statement of activities performed (also called the bill of activities) as shown below: Cost of direct materials Cost of purchased components Order No: 1502021 Customer: State House Units: 150 Type: 6 Set Amounts in $ Ugx 5,000,000 Ugx 3,500,000 Labor cost Activity Ugx 15,60,000 Relevant Cost Driver Activity Usage Production of components Machine hours 320 Assembly of components Number of labor hours 250 Packaging Units 150 Shipping Units 150 Setup costs Number of setups 15 Designing Product testing Required; Designer hours 70 Testing hours 22 a) Help management of Nina interiors to calculate the total costs using activity-based costing. (16 marks) b) Why would Tracy prefer Activity-based costing rather than the Traditional costing method? (05 marks) c) Are there limitations to the traditional costing method? (04 marks)