Q5. Company XYZ has 2 fixed price contracts for 2 different clients apart from other contracts. The company has enough capacity for both contracts but is uncertain whether they will be profitable.

Customer Bright Dull

Component Type AAABBB

Contract Quantity 1,000 unit 2,000 units

Material cost/unit $15 $20

Moulding time/batch 5 hours 7.5 hours

Batch Size 100 units50 units

Annual Budgeted overheads as follows:

Activity Cost Driver Cost driver Cost pool

volume/year

MouldingMoulding hours 2,000 $150,000

Inspection Batches 150$75,000

Production ManagementContracts 20 $125,000

Labor cost for product AAA is Rs. 10/unit while for product BBB is Rs. 15 per unit.

Previously company was using traditional system and Machine hours were used for allocation. Total Machine hours were 700,000/- Product AAA used 400,000 machine hours whereas product BBB uses 300,000 machine hours.

Required :-

a.Find out cost of both products under Traditional and ABC system and compare the results.

b.Out of Marginal and Absorption costing methods which costing approach is better and why?