Covers Ltdproduces two different types of car seat covers:Leather and Fabric. In 2022,Covers Ltdproduced 6,000 leather seat covers and 10,000 fabric seat covers. At the moment indirect costs are allocated on the basis of direct labour hours.

Covers Ltdrecently hired a new management accountant, Mason Wang. Mason thinksCovers Ltdshould consider indirect costs through pooling costs into different activities and then implement activity-based costing. Mason has done the preliminary work, and the details for each of the cost pools for the month with other information is provided below:

			Estimated numbers of Cost Driver
Activity	Cost driver	Estimated indirect costs	Leather	Fabric	Total
Design	Number of design changes	$250,000	400	100	500
Processing	Number of machine hours used	$750,000	12,000	10,000	22,000
Quality Control	Number of tests	$250,000	2000	300	2,300
Total overhead cost		$1,250,000

The direct costs are also provided as follows:

	Leather	Fabric	Total
Direct labour hours	20,000	15,000	35,000
Direct Labour costs	$150,000	$70,000	$220,000
Direct Material costs	$110,000	$20,000	$130,000
Number of Units	6,000	10,000	16,000

Covers Ltd'sowners want to apply a 100% mark-up to their cost price when setting their selling prices to ensure the business can keep up with the globally increasing materials costs.

a)

The indirect cost rate using traditional costing method is $35.71 per Direct Labour Hour, calculate total cost per unit forFabricseat covers only, using the below template (3 Marks)

	Fabric (workings)
Allocated indirect cost
Add Direct Costs
Total Cost
Units produced
Total cost per unit

b)

Mason recommendedCovers Ltdto change to Activity Based Costing, using the below template to calculate the activity cost rate forQuality Controlonly (1 Mark)

	Amount/ Calculations/ workings
Activity cost ($)
Cost driver
Activity/ indirect cost rate

c)

Mason has done comparisons between the current (traditional) costing method and activity-based costing method, and his findings are as below:

	Traditional Costing Method	Activity Based Costing Method
	Leather	Fabric	Leather	Fabric
Total cost per unit	$162.38	$62.57	$181.08	$51.35

i.Help Mason to explain to the owners ofCovers Ltdwhy the total cost per unit is different between the two methods? (1 mark)

ii. Highlight 2 benefits of using Activity Based Costing to the owners of Covers Ltd (2 Marks)

iii. The current selling price (using the 100% mark-up policy) are $325 per unit forLeatherand $125 per unit forFabricseat covers. What should be the selling price forFabric onlyifCovers Ltdwants to implement Activity Based Costing method (1 Mark). Comment on your findings for the new selling price ofFabric(1 Mark) and suggest whatCovers Ltdshould do to deal with any differences. (1 Mark)

	Fabric (workings)
Total cost per unit	$51.35
Selling Price	?