GGG Ltd currently calculates costs for contracts using traditional overhead absorption methods based on machine hours.

GGG is considering changing to Activity Based Costing (ABC) and has split the total overheads into the following five cost pools, each shown with their associated driver and driver volume

Budgeted Overhead	Activity Driver		Budgeted quantity of activity driver
Purchasing		7,000	Purchase orders processed	2,000
Material handling		8,750	Material movements	5,000
Machine maintenance		23,730	Machine hours	10,500
Quality Inspection		1,890	Inspections	1,200
Packaging		3,990	Units produced	3,800
Total Overheads - 45360

The company is in the process of bidding for two contracts;

Contract A, an order of 15 of a very time consuming and detailed products and

Contract B, an order of 6 more general products.

Information relating to these contracts is as follows: Contract A			Contract B
Purchase orders processed	25	2
Material movements	20	1
Machine hours	80	40
Inspections	20	1
Units produced	15	6

Required:

a) Calculate the total amount of overhead to be allocated to each contract and a per unit overhead, using the absorption costing method with machine hours as the basis for allocation.

Note: You should clearly show the overhead absorption rate within your answer.

(10 marks)

b) Calculate a revised overhead cost per contract and unit, using ABC.

Note: You should clearly show each driver absorption rate within your answer.

(15 marks)

c) Explain why GGG may prefer the ABC method over the absorption costing method, especially when pricing these particular contracts. (15 marks)

d) Discuss the benefits and problems of the ABC method (10 marks)