Naran ltd makes three products: A, B and C. The director of Naran is worried about the allocation of overheads. He is not convinced that the current allocation method that is based on machine hours allocates them accurately. However, he has recently heard about the concept of activity based costing and wants to try it. He hires Nkululeko a highly regarded MACN 301 student to help him in using ABC to allocate overheads. The following information is available:

Selling price per unit: A = R8500; B = 7 500; C= R 11 000

Total A B C

Units manufactured 900 400 280 220

Labour hours 7000 1500 2500 3000

Machine hours 7000 2500 1500 3000

Purchase orders 3000 700 800 1500

Production runs 5000 2000 2000 1000

Kilometres driven by sales reps80 000 30 000 30 000 20 000

Direct costs

Direct materials R2000 000 R 700 000 R500 000 R 800 000

Direct Labour R1000 000 R 350 000 R450 000 R 200 000

Total direct costs R3000 000 R1 050 000 R950 000 R1 000 000

Department Costs

Machine department R 800 000

Purchase department R 135 000

Selling department R 250 000

Total Costs R1 185 000

Required:

a) Using machine hours as a basis for allocating overheads; calculate the unit cost of products A, B and C. [6 marks]

b) Using activity based costing to allocate overheads; determine the unit cost of products A, B, and C. [7 marks]

c) Calculate the net income per unit under each of the two methods used in part a and part b. Show the most profitable product under each method. [6 marks]

d) Briefly the objectives and weaknesses of ABC. [7 marks]