Horn Product Ltd manufactures two types of products Handbags and Suitcases. Both products are produced using the same equipment and similar processes. The following budgeted data has been obtained for the year ended 31 December 2019.

Product Handbags Suitcases

Production quantity 12500 1250

Number of purchase orders

200 100

Number of set-ups 75 50

Resources required perunit HandbagsSuitcases

Direct material () 12.50 31.25

Direct labour (hours) 5.00 5.00

Machine time (hours) 2.50 2.50

Budgeted production overheads for the year have been analysed as follows:

Volume related overheads 137,500

Purchases related overheads 150,000

Set-up related overheads 262,500

The budgeted wage rate is 10 per hour. The companys present system is to absorb overheads by product units using rates per labour hour.

However, the company is considering implementing a system of activity-based costing. An activity-based investigation revealed that the cost drivers for the overhead costs are as follows:

Overhead cost Cost driver

Volume related overheads Machine hours

Purchases related overheads Number of purchase orders

Set-up related overheads Number of set-ups

Required:

a) Calculate the unit costs for each type of product using:

i. The traditional costing method.

ii. The proposed activity-based costing approach.

b) Compare your results in (i) and (ii) above and briefly comment on your findings.