Q1: The following are annual budgeted amounts for a manufacturer for the coming year (a normal year):

Total budgeted annual overheads costRM8,000,000

The activity pools which give rise to this annual overhead cost consist of:

-Procurement activity pool RM1,500,000 (budgeted 150 purchase orders per year)

-Production setup pool RM500,000 (budgeted 500 setups per year)

-Production activity pool RM 4,000,000 (budgeted 400,000 DLH per year)

-Marketing and Distribution activity pool RM2,000,000 (budgeted 20,000 salesman hours per year)

The company produces 10,000 units of Product A annually with the following unit costs: direct materials RM10, direct labour 2 hours.

Required:

a) Calculate the unit cost of Product A using volume based costing with DLH as the cost driver.

b) To produce and sell 10,000 units of Product A requires 10 purchase orders, 20 setups, 20,000 DLH, 200 salesman hours. Calculate the unit cost of Product A using Activity-Based Costing (ABC).

c) What are the benefits of using ABC?

d) What are the limitations of ABC?