1. Discuss the appropriate operating environment that is suitable for ABC system. (3 marks)

ANSWER a):

1. Betty Company Ltd manufactures two products, XO and X1. Estimates for the company's products for next year are provided below:

	XO	X1
Estimated production volume	4 000	3 000
Direct material cost	$70 / unit	$95 / unit
Direct labour per unit	2 hours @ $25 / hour	3 hours @ $25 / hour

Betty's estimated overhead of $1 600 000 can be identified with three major activities: order processing ($260 000), machine processing ($1 040 000) and product inspection ($300 000). These activities are driven by number of orders processed, machine hours, and inspection hours respectively.

Estimated activity levels for the next year are as follows:

	XO	X1	Total
Orders processed	400	600	1000
Machine hours	38 000	42 000	80 000
Inspection hours	8 000	16 000	24 000

Required:

Assuming that Betty Company Ltd uses activity-based costing to apply overhead to production, calculate the unit manufacturing costs of the XO and X1 products if the estimated manufacturing volume is attained. (4 marks)