Question 1 Horn Products Ltd manufactures two types of perfumes Ladies and Men. Both perfumes are produced using the same equipment and similar processes. The following budgeted data has been obtained for the year ended 31 December 2019. Product Production quantity Number of purchase orders Number of set-ups Ladies 50000 800 300 Men 5000 400 200 Ladies 50 Resources required per unit Direct material () Direct labour (hours) Machine time (hours) Men 125 20 10 20 10 Budgeted production overheads for the year have been analysed as follows: Volume related overheads Purchases related overheads Set-up related overheads 550000 600000 1050000 he budgeted wage rate is 40 per hour. The company's present system is to absorb overheads by product units using rates per labour hour. However, the company is considering implementing a system of activity- based costing. An activity-based investigation revealed that the cost drivers for the overhead costs are as follows: Overhead cost Cost driver Machine hours Volume related overheads Purchases related overheads Set-up related overheads Number of purchase orders Number of set-ups Required: Write a brief report to the Managing Director of Horn Products Ltd. This report should have an introduction, body and conclusion. (Maximum word limit: 500 words) This report should cover the following areas: Explain how an activity-based costing (ABC) system differs from a traditional absorption costing system. (5 marks) Calculate the unit costs for each type of perfume using: a. The traditional costing method. (10 marks) b. The proposed activity-based costing approach. (15 marks) Discuss your results in (a) and (b) above. (5 marks) Explain the advantages and disadvantages of using ABC. (10 marks) Discuss the potential difficulties the company might face in changing to ABC