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Heaven Sdn Bhd is a well-known company manufacturing exclusive popcorn containers. The most popular items from its product line are PCI and PC2. The company

Heaven Sdn Bhd is a well-known company manufacturing exclusive popcorn containers. The most popular items from its product line are PCI and PC2. The company is currently using the traditional costing system to determine the production overhead. The product cost per unit is as follows:

PCI

PC2

Unit manufacture

12,000

38,000

Prime cost (RM)

7.00

8.00

Production overhead (RM)

1.50

2.50

Total product cost (RM)

8.50

10.50

One of the management team members has suggested to the company to calculate the production overhead using an activity-based costing (ABC) system. The amount of production is traceable to the two products as follows:

Activity

Cost driver

Overhead

Cost driver demanded

Cost driver demanded

PCI

PC2

Purchasing

Number of orders

20,000

15 orders

25 orders

Machining

Machine hours

100,000

5,000 hours

10,000 hours

Quality control

Number of inspections

10,000

50 inspections

150 inspections

Packaging

Number of units produced

6,000

12,000 units

38,000 units

Required:

a) Determine cost driver rates for each of the activities. (8 marks)

b) Calculated the product costs per unit for product PC2 only using the ABC system. (8 marks)

c) compare the product costs per unit of PC2 under the traditional costing system and the ABC system. (5 marks)

d) propose whether this company should use a traditional costing system or an ABC system. provide ONE (1) reason to support your answer. (4 marks)

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