Oxford publishes two type of book.

The company publishes a finance book (FB), which is sold in large quantities to government controlled schools.

The book is produced in only four large production runs but goes through frequent government inspections and quality assurance checks.

The FB will be inspected on 180 occasions next year, whereas the TJ will be inspected just 20 times.

Oxford publishing will produce its annual output of 1,000,000 FBs in four production runs and approximately 10,000 TJs per month in each of 12 production runs.

There are three main overheads the data for these are:

Overhead Annual Cost Activity driver

Property cost 2,160,000 Machine hours

Quality control 668,000 Number of inspections

Production setup costs 52,000 Number of setup

2,880,000

The directors are keen to introduce AC for the coming year and have provided the following cost and selling price data:

The paper used costs RS 2 per kg for a FB but the TJ paper costs only RS 1 per kg. The FB uses 400g of paper for each book, four times as much as TJ uses.

Printing ink costs RS 30 per litre. The FB uses one third of the printing ink of the large TJ. The TJ uses 150 ml of printing ink per book.

The FB needs six minutes of machine time to produce each book, whereas the TJ needs 10 minutes per book. The machine cost RS 12 per hour to run.

The sales prices are to be RS 9.30 for the FB and RS 14.00 for the TJ.

Required:

Calculate the cost per unit and the margin for FB and the TJ using machine hours to absorb the overheads.

Calculate the cost per unit and the margin for the FB and the TJ using activity base costing principles to absorb the overheads.

Discuss whether traditional costing method is beneficial or activity base costing methods explain.