Homework - Activity-Based Costing Solution Yousef Industries is a car lamp manufacturer. Currently, the company uses traditional costing system to assign overheads. Under the system, the company assigns production overheads on the basis of direct labour cost. However, the management of the company is worried that the traditional cost accounting system does not appear plausible and reliable. As a cost expert, you have been consulted by the management of Yousef Industries to introduce Activity Based Costing system. After analyzing the cost environment, you identified three activities and related cost drivers for production overheads. Material handling activities are noted to be driven by direct materials cost. Engineering activities are driven by engineering change notices. Power activites are driven by kilowatt hours. Production overheads are as follows: Material handling Engineering Power KD 12,000 20,000 16,000 48,000 Three types of car lamps are produced: Flash, Ray and Dim. Your investigation revealed the following details of direct costs and cost driver activities related to each of the car lamps produced. Flash Ray Dim Engineering change notices 13 5 2 Kilowatt hours 50,000 200,000 150,000 KD Direct materials cost Direct labour cost KD 25,000 4,000 KD 50,000 1,000 125,000 3,000 Required: 1. Assign the production overheads to the products using the ABC system. 2. Assign the production overheads to the products based on direct labour costs as currently practiced under the traditional costing system. 3. Critically, examine the current practice of assigning production overheads based on direct labour cost. 4. Based on your analysis and design, demonstrate to management the usefulness of the ABC system in comparison to the traditional costing system