QUESTION 1: MINI CASE STUDY (12+ 8 = 20 MARKS) Oriental Motor Assembly Pte Ltd assembles three types of motorcycle at the same factory in Singapore: the 100cc Discover; the 250cc Pulsar and the 1000cc Punch. It sells the motorcycles throughout the world. In response to market pressures Oriental Motors has invested heavily in new manufacturing technology in recent years and, as a result, has significantly reduced the size of its workforce. Historically, the company has allocated all overhead costs using total direct labour hours, but is now considering introducing activity-based costing (ABC). Oriental Motors accountant has produced the following analysis. Annual Output (Units) Annual Direct Selling price ($ labour hours per unit) Raw material cost ($ per unit) Discover 2000 200,000 4,000 400 Pulsar Punch 1600 400 220,000 6,000 600 80,000 8,000 900 The three cost drivers that generate overheads are: Deliveries to retailers: the number of deliveries of motorcycles to retail showrooms Set-ups: the number of times the assembly line process is re-set to accommodate a production run of a different type of motorcycle. Purchase orders: the number of purchase orders. The annual cost driver volumes relating to each activity and for each type of motorcycle are as follows: Number of deliveries to Number of set-ups retailers Number of purchase orders Discover 100 35 400 Pulsar 80 40 300 Punch 70 25 100 The annual overhead costs relating to these activities are as follows: Particulars Amount ($) Deliveries to retailers 2,400,000 Set-up costs 6,000,000 Purchase orders 3,600,000 All direct labour is paid at $5 per hour. The company holds no stocks. At a board meeting there was some concern over the introduction of activity-based costing. The finance director argued: "I very much doubt whether selling the Punch model is viable but I am not convinced that activity-based costing would tell us any more than the use of labour hours in assessing the viability of each product". QUESTION 1 continued on next page 2