Gore Construction provides a wide range of construction services to the public. They recently built a housing scheme which comprises of two housing solutions. 950 sq. ft and 1,200 sq. ft. Upon investigation, Gore observed that the 950 sq. ft. units are selling faster than the 1,200 sq. ft units.

Gore has a policy to price all jobs at budgeted total cost plus 40%. Overheads are currently absorbed on a labour hour basis. The entity believes that switching to an activity-based costing (ABC) system to absorb overheads would reduce the costs associated with 1,200 sq. ft. units to make them more competitive.

You are given the following data:

Overhead category	Annual overheads	Activity driver	Activities per year
Supervisors	$ 4,050,000	Site visits	2,250
Planners	$ 3,150,000	Planning documents	1,125
Property related	$10,800,000	Labour hours	180,000
Total	$18,000,000

The 950 sq. ft. unit usually takes 3,150 labour hours to complete and only requires 4 site visits by a supervisor and needs 6 planning documents to be raised. It also incurs material cost and labour cost of $2,029,050 and $1,642,950 respectively. The 1,200 sq. ft. unit requires 4,500 labour hours, 7 site visits and 5 planning documents, it also incurs material and labour cost of $4,275,000 and $2,700,000 respectively.

Required:

(a)Calculate the total cost and selling price assigned to a scheme unit using the traditional approach. (4 marks)

(b)Calculate the total cost and selling price assigned to both units using the ABC principles assuming that the entity anticipates adding a 30% margin. (13 marks)

(c)Explain three implementation problems often experienced when the activity-based costing (ABC) is first introduced in an entity.