P.12.8 Garden Tools Manufactures Ltd. (GTML.) produces garden tools and lawn maintenance products that are sold through an All-India chain of stores. The GTML manufactures more than 50 products and approximately 20 per cent of its revenue comes from selling small home garden tools such as rakes, pruners and spades. It also manufacturers high-quality lawn movers, edgers and blowers for professional lawn service companies. Sales of these products, however, have not been a major source of revenue. The CFO of GTML, Harsha Desai, is concerned about the apparent profitability of two of its products, namely, (1) a high-volume product Model-300 spade and (ii) a low-volume product, Model-800 mowers. At the beginning of current year, the total estimated manufacturing overhead was 20,00,00,000 and the estimated total labour cost was 34,00,00,000. For the current year, the expected sales revenues from sale of Model-300 spade and Model-S00 mowers are summarised below: j11 400 2 Sales revenue Particulars Model-300 Spade Model-800 Mower 1 Number of units sold 42.500 38,25,000 $12,00,000 3 Direct labour cost 4,59,000 60,000 4 Direct material cost 7,65,000 2,40.000 The GTML allocates manufacturing overheads to products based on direct labour cost. The product process for spades is fairly simple. The GTML uses one supplier for the metal handle and blade. It produces shafts on an automatic lathe and the handles, blades and shafts are assembled by hand at single workstation. The production process for mowers is much more complicated. Twenty suppliers are used to supply the 50 components involved in producing the Model-800. Moreover, assembly of mowers makes uses of 15 separate assembly workstations. The estimated total manufacturing overhead (320,00,00,000) is related to four cost drivers as shown below: Overhead cost item pool Annual cost Cost driver Estimated annual Cost per value driver unit (1) (2) (3) (5) 1 Set up costs 12,00,00,000 Number of setups 1,000 $20,000 2 Material handling cost 1,00,00,000 Number of material 2,000 5,000 per requisition requisitions 3 Depreciation of equipment 5,00,00,000 Number of requisition 20,000 2,500 per machine-hour 4 Others 12,00,000 Number of work- 3,000 work 40,000 per stations used in stations across workstation production of product all products The production information for 42,500 spades (Model-300) and 400 Mowers (Model-S00) is summarised below: Particulars Model-300 spade Model-800 mower 1 Number of setups 2 Number of material requisitions 50 3 Number of machine-hours 40 100 4 Number of workstations 15 REQUIRED: From the above information, compute the profitability of the two products: M-300 spade and M-800 mowers, using (a) traditional costing approach/system and (b) ABC system/approach to allocate manu- facturing overheads, Comment on the differences in (a) and (b) 5 3