Hi there,

I have a question that I don't know how to work it out. If anyone can help it would be very much appreciated. Thanks!

KL Ltd. operates an activity-based costing system and has forecasted the following information for overhead activities next year.

Cost Pool	Total Costs	Cost driver	Number of drivers
Production set-ups	$105,000	Set-ups	300
Product testing	$300,000	Tests	1,500
Component supply and storage	$25,000	Component orders	500
Customer orders and delivery	$112,500	Customer orders	1,000

The companys general fixed overheads such as lighting and heating, which cannot be linked to any specific activity, are expected to be $900,000, and these overheads are absorbed on a direct labour hour basis. Total direct labour hours for next year are expected to be 300,000 hours.

KL Ltd. expects orders for its one of products, Product ZT3 next year to be in two slots: i) 100 orders of 60 units per order and, ii) 60 orders of 50 units per order. The company holds no stocks of product ZT3 and will need to produce the order requirements in production runs of 900 units per production run. KL Ltd.s practice is to place one order for components used by product ZT3 prior to each production run. Four test runs are undertaken during each production run to ensure that quality standards are maintained. The following additional cost and profit information relates to product ZT3.

Direct material cost: $1 per unit

Direct labour: 10 minutes per unit at $7.8 per hour

Profit mark up: 40% of unit cost

i) Calculate the activity-based cost/activity driver rate for each cost pool.

ii) Calculate the cost per unit and selling price per unit of Product ZT3.

iii) Discuss whether the use of cost drivers in a traditional accounting system differs from those in an activity-based costing system.