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1 of 3 Leo1151: Introduction to Management Accounting Seminar6 P8-7 ABC vs traditional overhead Time allowed: 30 minutes The management of Vegetarian Meals Ltd, who make three main product lines of ready-made vegetarian meals in batches for the restaurant trade, are reviewing the cost accounting policy in relation to overheads. Currently the company absorbs overheads on the basis of direct labour hours. Some of the management board feel that the company should switch to activity- based costing (ABC), as the product lines make different demands on the company's overhead resources -in particular, Mexican Beanfeast requires a lot of advance soaking of a wide variety of raw beans and pulses, peeling and preparation and so on. You have been asked to demonstrate the difference between the existing and the proposed method of dealing with overheads. The following information is available to assist you Mexican Bean Eastern Mazerial E12 per ko) our (9 per hour) Machine hours per unit e18.00 18.00 12 minutis E36.00 24.00 6minute 6minne Units per batch Sales prioe Sales demand Overhead cots Machine related Quality teeing Machine set-up costs Material movements 663.00 58.00 660.00 3,200 3,600 4,500 74,500 17,145 654 825 660,000 driven by machine hour driven by number of unis driven by number of banches driven by number of ilos Calculate the profit or loss on each product using traditional overhead recovery (plantwide rate using direct labour hours as a base) and assuming normal absorption a. b. Calculate the profit or loss on each product using ABC overhead recovery and normal absorption costing. Give your recommendation and explain your reasons. e