Liverpool Ltd produces two types of exclusive business bags for men, standard and executive. The company is currently using simple costing systems that have two direct costs categories (material and labour) and one indirect cost pool. The simple costing systems use total budgeted direct labour hours of 8,850 to allocate its indirect costs. Due to increase of the competition in the market, the management consider to change its cost systems from simple to ABC costing. The production information for the most recent year is as follow:

Standard Executive

Units produced and sold 3,2001,800

Selling price $125 $200

Direct materials costs per unit bag $30 $45

Direct manufacturing labour cost per hour $20 $20

Direct manufacturing labour hours per unit bag 1.5 hours 2.25 hours

Direct manufacturing labour cost per unit $30 $45

After analysing its indirect costs pools, the company found five activities that generate the indirect costs: Production scheduling, materials handling, Machine setup, Assembly and Inspection. The company has completed a research on its indirect cost activities and provides the following:

Activity Activity Cost Activity-cost driver Activity Usage

Standard Executive Total Production scheduling $95,000 production runs 40 85 125 Materials handling $42,000 Material moves 72 168 240 Machine setup $20,000 Machine setups 45 155 200 Assembly $50,000 Machine hours 4,500 5,500 10 000 Inspection $23,100 Number of inspections 150 312 462

Calculate and show working:

(a) Using the simple costing system, calculate the product cost per unit for Standard and Executive bags.

(b) Using Activity Based Costing System, calculate the product cost per unit for Standard and Executive bags.

(c) Compare the cost of Standard and Executive bag using the simple and ABC systems and explain why the product costs differ between the two systems for both products.