Diamond plc is a manufacturer of small domestic electrical appliances. Its market is very competitive in terms of both price and new product innovation. As a result product life cycles are short. per unit Direct material 4.50 Direct labour (12 per hour) 0.50 Production overheads ( 120 per hour) 5.00 Production cost 10.00 Diamond plcs managers are concerned about the reliability of its product costing system. It currently uses an absorption costing system and absorbs overheads on the basis of budgeted direct labour hours. On this basis the estimated cost of its latest product, a talking electric kettle, is as follows: The firms management accountant has suggested that more accurate product costs would be obtained if an activity-based costing (ABC) approach were used. He has collected the following information as a starting point for an ABC treatment of production overhead costs. Budgeted factory overhead per annum Cost Pools Cost per annum Cost driver 000 Stores administration 5,000 Number of different components Production line set ups 3,000 Number of set ups Dispatch 1,000 Number of dispatches Other overheads 3,000 Direct labour hours Total production overhead 12,000 Estimated activity per annum Cost Driver Total Activity per annum Number of components 2,000 items Number of setups 10,000 setups Number of dispatches 20,000 dispatches Direct labour hours 100,000 hours Each talking kettle uses 10 different components and kettle manufacture will involve six production line setups per annum. Five hundred dispatches will be required per annum. Budgeted production is 10,000 kettles per annum. Required: Estimate the cost of a talking kettle using an ABC approach and the cost drivers suggested by the management accountant. (10 marks) Diamond plcs Finance Director supports the proposal to introduce activity-based costing but argues that the firm should consider all the costs involved in the development, production, and marketing of the kettle. In addition to the above ABC costs, 30,000 has already been spent on research and development for the talking electric kettle and he estimates that a further 5,000 will be spent on marketing the new product. There are no other costs attributable to the new product. Total sales over its life will be 10,000 units per annum for the next two years. From past experience, he knows that the firm will have to reduce the selling price of the kettle by 40% in its second year of sales in order to remain competitive. Required: Explain what is meant by life-cycle costing. Give two reasons why a life cycle costing approach could be of value to Diamond plc. (5 marks) (15 marks)