Frantic Plcassembles three types of motorcycle at the same factory: the 50cc Sunshine; the 250cc Roadster and the 1000cc Fireball. It sells the motorcycles throughout the world.

In response to market pressuresFrantic Plchas invested heavily in new manufacturing technology in recent years and, as a result, has significantly reduced the size of its workforce.

Historically, the company has allocated all overhead costs using total direct labourhours butis now considering introducing Activity Based Costing (ABC).Frantic Plc's accountant has produced the following analysis.

Annual OutputAnnual direct labourSelling PriceRaw material

(units)hours( per unit)cost( per unit)

Sunshine2,000200,0004,000400

Roadster1,600220,0006,000600

Fireball40080,0008,000900

The three cost drivers that generate overheads are:

Deliveries to retailers-- the number of deliveries of motorcycles to retail showrooms

Set-ups-- the number of times the assembly line process is re-set toaccommodate

a production run of a different type of motorcycle.

Purchase orders-- the number of purchase orders.

The annual cost driver volumes relating to each activity and for each type of motorcycle are as follow:

Number of deliveriesNumber of set-upsNumber ofpurchase

To retailersorders

Sunshine10035400

Roadster8040300

Fireball7025100

The annual overhead costs relating to these activities are as follows:

Deliveries to retailers2,400,000

Set-up costs6,000,000

Purchase orders3,600,000

All direct labour is paid at 5 per hour. The company holds no stocks.

At the board meeting there was some concern over the introduction of activity-based costing.

The finance director argued:'I very much doubt whether selling the Fireball is viable but I am not convinced that activity-based costing would tell us any more than the use of labour hours in assessing the viability of each product.'

The managing director argued:' I believe that activity-based costing would be an improvement, but it still has its problems. For instance, if we carry out and activity many times surely, we get better at it and costs fall rather than maintain constant. Similarly, some costs are fixed and do not vary either with labour hours or any other cost driver.'

The chairman argued:' I cannot see theproblem. Theoverall profit for the company is the same no matter which method of allocatingoverheads we use. It seems to make no difference to me.'

(a)Calculate the total profit on each ofFranticplc three types of product using each of the following methods to attribute overheads:

(i)The existing method based upon labour hours.

(ii)Activity based costing.

(b)Write a report to the directors ofFrantic Plc, as its management accountant. The report should:

(i)Evaluate the labour hours and the activity-based costing methods in the circumstances ofFrantic Plc; and

(ii)Examine the implications of activity-based costing forFrantic Plc, and in so doing evaluate the issues raised by each of the directors.