Q2. FireFly Ltd manufactures two electronic components in their Somerset factory. The business has traditionally used an absorption costing system to allocate overheads though are now considering changing this to an activity-based costing (ABC) approach. The following information has been provided by the Finance Director Component A Component B Total Raw Materials costs 80,000 70,000 Total Direct Labour costs 120,000 150,000 Labour time per component 0.75 hours 1.5 hours Number of machine set-ups 20 30 Number of purchase orders 400 100 Number of inspections 10 15 Number of sales invoices processed 300 Number of components manufactured 16,000 10,000 700 FireFly adds a 50% mark-up to the total cost when setting the product's selling price. The traditional absorption costing system was based on labour hours with overheads being absorbed at 5 per labour hour An accountant in the company has researched the overheads and has identified they comprise of the following: Machinery Set-up costs 30% Material Ordering costs Inspection costs 10% Selling expenses 20% 40% Hint: You need to calculate the total overheads from the information given Required: a) Calculate the cost and profit for each unit of both components using the traditional absorption costing method [6 marks) b) Calculate the cost and profit for each product using an Activity Based Costing approach [12 marks] c) Discuss the differences in your calculations from i) and ii) above and recommend whether the company should adopt the ABC approach [7 marks] [Total 25 marks) Page 5 of 10 MN30170