Multi Kitchen Sdn Bhd manufactures and sells 3 type of kitchen faucets: Brass, Chrome and White. Production takes 25, 25 and 10 machine hours to manufacture 1000 units batches of each of these faucets respectively.

The following data applies:

Brass Chrome White

Sales in units 30,000 50,000 40,000

Per unit data: RM RM RM

Selling price 40.00 20.00 30.00

Direct materials 8.00 4.00 8.00

Direct Labour 15.00 3.00 9.00

Overhead cost based

On direct labour hours 12.00 3.00 9.00

(Traditional system)

Hours per 1000 units:

Direct labour hours 40 10 30

Machine hours 25 25 10

Set up hours 1 0.5 1

Inspection hours 30 20 20

Total overhead costs and activities levels for the year are estimated below:

Activity Activity levels Overhead costs (RM)

Direct labour hours 2,900 hours

Machine hours 2,400 hours

Set ups 95 set up hours 465,500

Inspections 2,700 inspection hrs 405,000

870,500

Required:

1. Using the traditional system, determine the operating profit per unit for the Brass faucet (2 marks)

2. Determine the activity cost driver for set up costs and inspection costs. (3 marks)

3. Using the activity-based costing ABC system, for Brass faucets:
4. Compute the estimated overhead cost per unit (8 marks)
5. Compute the estimated operating profit per unit (2 marks)

4. Explain the difference between profits obtained from the traditional system and the ABC system. (2 marks)

5. Advice which system provides a better estimate of profitability and why is that so? (3 marks)