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Design Ltd manufactures custom made handbags. At the moment the company has two types of products on the market, the Sparkle which is sold for

Design Ltd manufactures custom made "handbags". At the moment the company has two types of products on the market, the "Sparkle" which is sold for $180 and the "Clutch". The company currently uses a traditional costing system and allocates overhead costs based on an estimated 64,000 direct labour hours. The following cost information has been used as a basis for pricing decisions over the past year. The company has produced 25,190 units of Sparkle and 21,880 units of Clutch.

Per-unit data

Sparkle

Clutch

Direct labour hours

3.5

2.5

Direct labour cost per hour

$16

$13

Direct materials

$65

$35

Direct machine hours

2.5

1.5

Administration Cost

$10

$10

The company has recently appointed a new Management accountant and she is considering the use of Activity Based Costing to apply overhead and has collected the following data:

Number of Events

Activity center

Cost driver

Traceable costs $

Sparkle

Clutch

Set-ups

Number of setups

$50,000

100

100

Special design

Design hours

$182,000

900

100

Packaging

Packaging orders

$450,000

20,000

30,000

Machining

Machine hours

$150,000

9,000

1,000

Total manufacturing overhead costs

$832,000

Required: (where necessary round off answer to 2 decimal places). You must show ALL workings in order to receive full marks for each component.

a. Using the traditional costing system, calculate the company's predetermined overhead rate.

b.Calculate the total product cost per unit of both products (Sparkle and Clutch) using the traditional overhead allocation rate calculated in part (a) above.

c. Calculate the overhead activity rate for each activity centre using the Activity Based Costing (ABC) approach

d.Using an Activity Based Costing (ABC) approach calculate the total product costs of one unit of Sparkle and one unit of Clutch.

e.Calculate the operating profit for one unit of Sparkle using the figures you calculated under the ABC method.

f.Discuss why the unit cost for the Sparkle was different under the two costing techniques used above.

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