Diamond Manufacturing Company$($DMC$)$ has three product lines: P$1,$P$2$ and P$3.$Since its creation the company has been using a single labour cost percentage to assign overhead costs to products.

Despite P$3,$ a relatively new line, attracting additional business, increasing overhead costs and a loss of market share,particulary for P$2,$ a major product, have convinced the management that the costing system is in neeed of some development.A team, led by the management accountant was established to develop an improved system of costing based on activities.The team spent several weeks collecting data$($see tables below$)$ for the different activities and products. For the accounting period in question, given in the tables below is data on DMC$\text{'}$s three product lines and overhead costs:

Product P$1$ P$3$ P$3$

Production volueme $($Units$)7,50012,5004000$

Direct labour cost per unit K$4$ K$8$ K$6\mathrm{.}40$

Material cost per unit K$18$ K$25$ K$16$

Selling price per unit K$47$ K$80$ K$68$

Materials movements $($in total$)42550$

Mahine hours per unit $0\mathrm{.}50\mathrm{.}50\mathrm{.}2$

Set$-$ups $($in total$)1510$

Proportion of engineering work $30\%20\%50\%$

Orders packed $($in total$)1722$

Activities Cost Pool

Material receiving and handling $150,000$

Machine maintenance and depreciation $390,000$

Set$-$ups labour $18,688$

Engineering $100,000$

Packing $718,688$

Total $718,688$

Required:

$($a$)$ Calculate the overhead rate and the product unit costs under the absorption system.

$($b$)$ I dentify for each overhead activity, an appropriate cost drivr from the information supplied, and then calculate the product unit costs using activity based costing.

$($c$)$ Comment on the results of the two costing systems in $($a$)$ and $($b$)$ above.