Question 1 Bradford Watch Company manufactures luxury and sports watches both for male and female customers. The luxury watches are famous for the high-end design materials while the sports Watches are popular for their utilities. The company uses a traditional costing system in assigning overhead costs to the products on the basis of direct labour hours. However, the Production Manager seeks to replace the existing system with the Activity-based Costing (ABC) system to keep control over costs and offer more competitive pricing. After reviewing the existing costing system and interviewing the company's personnel in relevant departments, the accountant compiled a report highlighting resources and costs involved in manufacturing watches per month: 1. The following table lists out the overhead cost: Activity cost pool Overhead Additional Notes cost () Job-order set up 33,000 Procurement and placement 360,000 Installation of winding system 195,000 An auto winding system is fitted with every watch Quality inspection (machine) Quality inspection (manual) Finishing Packaging and delivery 60,000 21,000 140,000 Hand-made finishing 44,250 The company packages and delivers watches in batches containing 10 watches per batch. On an average. the packaging and delivery cost is the same for all batches (10 watches= 1 batch) |Factory cleaning services 30,000 A cost that is not consumed by any of the products 2. The company pays 8 per direct labour hour 3. The following table lists out some key figures for this firm: Description Quantity Number of watches 1,500 units Direct labour hours 7,000 hours Machine hours 14,000 hours Number of job orders Inspection hours using machine 800 hours Number of cycles for procurement and placement 2,400 times 110 Required: a) Calculate the manufacturing overhead absorption rate using the traditional absorption costing system (3 marks) b) What would be the sales price of the following two products using the ABC system if the company adds 30% mark-up on total allocated costs? Model Luxury Category Female Job order number LF-340 & LF- 341 Number of units 30 Direct materials ( per unit) 85 Direct labour hours 200 Machine hours 225 Inspection hours using machine 12 Number of cycles for procurement 50 and placement Sports Male SM-119 & SM-120 50 55 250 750 40 80