Battle Computers Ltd (BCL) make laptop computers for use in harsh and unpredictable environments. The companys primary customers are organisations like mining companies and security firms who require a laptop that can survive rough handling and can be made to their unique requirements. The company started as a basic laptop manufacturer, but had to find a niche market when its competitors grew much larger and BCL was no longer able to compete. It is now considered one of the best quality producers in this sector. A new chief executive officer (CEO) has been appointed who wishes to review BCLs financial control systems to get better information with which to make future decisions about the company. The CEO wants to begin by looking at the pricing of the laptops to ensure that BCL is not selling expensive products at the wrong price thereby compromising profit margins. Each laptop is individually specified by customers and pricing has traditionally been on a production cost plus basis with a mark-up of 45%. The company uses an absorption costing system based on labour hours in order to calculate the production cost per unit. The CEO is worried by the recent movement of its major competitors into BCLs market and so wants a report on the current costing system and any suggestions for improvement. The following information has been made available to aid your analysis

Financial and other information for Battle Laptops

Battle Laptops

Data for the year ended 30 September 2020

Production (units) 23,800 Total

000

Direct variable costs

Material 40,650

Labour 3,879

Packaging and transport 2,118

Subtotal 46,647

Overhead costs

Customer service 7,735

Purchasing and receiving 2,451

Inventory management 1,467

Administration of production 2,537

Subtotal 14,190

Total 60,837

Other information relating to the overhead activities

Labour time per unit 3 hours

Total minutes on calls to customer 899,600

Total purchase orders raised 21,400

Total components used in production 618,800

Special order

An order has been received from an important client which may lead to more business in the future if successful. The following information relates to that order.

Units ordered 16

Direct costs for this order:

Material 27,328

Labour 2,608

Packaging and transport 1,424

Other activities relating to this order:

No of minutes on calls to customer 1,104

No of purchase orders raised 64

No of components used in production 512

Administration of production (absorbed as general overhead) 3 Labour hrs per unit

Required:

The CEO has asked you to provide a report which addresses the following issues:

(a) An evaluation of the current method of costing against an Activity Based Costing (ABC) system. You should provide illustrative calculations using the information provided on costs for 2020 and the special order.