QUESTION 1

Alfresco Limited manufactures picnic tables for the Zimbabwean market. Since its inception, it has allocated overhead costs based on labour hours. The Managing Director is happy with this approach as he can understand the calculations and it is relatively quick to calculate the overhead rate per labour hour. Despite this, the accountant Mr Mufushwa is eager to adopt an activity based costing approach to overhead allocation. Mr Mufushwa has already studied the 'cost drivers' of Alfresco Limited and identified the following:

Activity:

Cost Driver:

Cost Pool:

Assembly costs

Number of labour hours

$56,000

Purchasing department

Number of purchase orders

$44,000

Delivery Costs

Number of deliveries

$42,000

Machine maintenance

Machine hours

$45,000

Alfresco Limited manufactures three different styles of picnic tables: 'Round', 'Square' and 'Octagon'. Information relating to the manufacturing process is as follows:

Round

Square

Octagon

Direct material cost

$157,500

$157,500

$210,000

No. of machine hours required

1,200

400

1,400

No. of labour hours

3,000

4,000

3,000

No. of purchase orders

3

2

6

No. of deliveries required

10

30

20

Production (units)

1,500

1,500

2,000

Selling price (mark-up on cost)

30%

30%

40%

REQUIRED:

(a)Calculate the selling price for each of the three products, using the traditional

approach to costing.(6 marks)

(b)Calculate the selling price for each of the three products, using Activity Based

Costing.(14 marks)

(c)Describe the circumstances where traditional costing systems are likely to report distorted costs. You should include appropriate reference to your calculations performed in parts (a) and (b) when describing such circumstances.(5 marks)

NOTE: Figures should be rounded to two decimal places.[Total: 25 marks]