Historically, the company has allocated all overhead costs using direct labour hours, but is

not considering introducing Activity Based Costing $($ABC$).$ Samba $($Pty$)$ Ltd$\text{'}$s management

accountant has produced the following analysis:

The three cost drivers that generate overheads are:

Deliveries to retailers $-$ the number of deliveries to retailers

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

Purchase orders $-$ the number of purchase orders

The annual cost driver volumes relating to each activity and for each type if product are as

follows: $$

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

Direct labour is paid at R$5$ per hour. The company holds no opening or closing stocks.

At a recent board meeting, there was some concern over the introduction of Activity Based

Costing. The finance director argued: "I doubt whether selling ZigZags is viable but I am

convinced that ABC would tell us more than the use of labour hours in assessing the viability

of each product." $$

The marketing director argue: "I am in the process of negotiating a major contract for

ChipNix. For such a big order they will not pay our normal prices but we need to atleast

cover our incremental costs. I am not convinced that ABC would achieve this as it merely

averages costs for our entire production."

The managing director argued: "I believe that ABC would be an improvement but it still has

its problems. For instance if we carry out an activity many times, surely we get better at it

and costs fall rather than remain 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 the problem. The overall profit for the company is the

same no matter which method of allocating overheads we use. It seems to make no

difference to me$."$

REQUIRED:

On a per unit basis, calculate the profit for each of Samba's products using the

existing method of allocating overheads. $(10$ marks$)$

On a per unit basis, calculate the profit for each of Samba $($Pty$)$ Ltd$\text{'}$s products using

the Activity Based Costing method of allocating overheads.

Compare the per unit profits calculated in $(1)$ and $(2)$ above and comment on the

reasons for any differences. $(5$ marks$)$

Evaluate the use of direct labour and Activity Based Costing as methods of allocating

overheads. $(5$ marks$)$

Write a report to the directors of Samba $($Pty$)$ Ltd$,$ as its management accountant,

examining the implications of Activity Based Costing for Samba $($Pty$)$ Ltd$,$ and in

doing so$,$ evaluate the issues raised by each director.

$(15$ marks$)$

Round all workings to $2$ decimal places.