Question 1 Hanahana Ltd. is a family firm and it has been producing its award-winning racing cycles for over 25 years. The 3 types of racing cycles are assembled at the same workshop. The cycles are: The Prestige, The Pacer and The Scorer. As the company is growing, in order to compete with its competitors, it has started to use more digital manufacturing and so has reluctantly reduced its labour work force. Traditionally, Hanahana Ltd. absorbed its overheads on a labour hour basis. Last month they decided to appoint a Management Accountant, Ms. Watson, who intends to look at the whole costing/pricing system. Ms Watson is considering that given the change of production process, a change to Activity Based Costing (ABC), in order to absorb overheads, may be beneficial to the company.

The following information has been provided: Annual output in units:

The Prestige 1,000

The Pacer 2,000

The Scorer 1,500

Annual Direct Labour Hours: The Prestige 200,000

The Pacer 250,000

The Scorer 150,000

The overheads have been provided as follows:

Set up costs 1,000,000

Inventory costs 200,000

Quality Control 1,200,000

2,400,000

The 3 cost drivers have been identified as:

Set up costs - the number of times the machine is set up to produce the cycles.

Inventory costs - the number of stores requisitions.

Quality control - the number of sales orders.

Number of set ups:

The Prestige 35

The Pacer 25

The Scorer 20

Number of Stores requisitions:

The Prestige 150

The Pacer 250

The Scorer 100

Number of sales orders:

The Prestige 125

The Pacer 75

The Scorer 100

Other information includes:

Direct Materials per unit

The Prestige 1,200

The Pacer 800

The Scorer 1,000

All direct labour is 10 per hour.

Required: a) Calculate the cost of a unit and its selling price using Full Cost plus Pricing for each type of product, if the company requires 30% profit, using: 1. The traditional method of absorbing overheads 2. Activity Based Costing (21 marks)