Question 1 Steelwatch Ltd. is a company specialised in the manufacture and sale of mechanical watches. The company was founded in 1940s; the business started with a small shop and over the years it has established its reputation for producing durable and water resistant watches. The manufacturing process involves two main departments: Department A deals with watch design and Department B deals with watch assembly. Steelwatch Ltd. currently uses a plant- wide overhead rate based on direct labour hours for allocating overhead costs. For the current year, the budget includes 96,000 for overhead costs, 24,000 for direct labour costs in Department A (design) paid at 12 per hour, and 14,000 for direct labour costs in Department B (assembly) paid at 14 per hour. Steelwatch Ltd. is working on two jobs, namely a basic watch (Job A) and a luxurious watch (Job B) which require the following inputs: Job A Job B Direct materials 4,000 12,000 Direct labour - Design (Department A) 1,500 3,600 Direct labour - Assembly (Department B) 2,800 3,192 Number of units produced 500 600 You are the new management accountant of Steelwatch Ltd. and you are expected to work on cost allocation. The company intends to replace the current allocation system based on a plant- wide rate with departmental overhead rates where design overheads of 58,000 are allocated based on direct labour hours and assembly overheads of 38,000 (1,000 hours) are allocated based on machine hours. Based on your knowledge and experience, you have further suggested the senior management to consider implementing an activity based costing system, that would be more adequate to reflect the higher complexity of the business. For Steelwatch Ltd., the following activities, their estimated cost, their cost drivers and cost driver quantities for the current year have been identified: Activity Activity Cost Set up production lines 15,000 Product design 25,000 Product assembly 35,000 Quality control 21,000 Total overheads 96,000 Cost Driver Cost Driver Qty Setup hours 2,500 Direct Labour hours 2,000 Direct labour hours 4,000 Number of inspections 1,500 Required: a) Calculate the plant-wide overhead rate for the current year and determine the total cost and cost per unit for each job. [6 marks] b) Recalculate the total and per unit cost for each job using departmental overhead rates. Assume Job A uses 210 machine hours to make 500 units and Job B uses 220 machine hours to make 600 units. [8 marks] c) Recalculate the total and per unit cost for each job using activity based overhead rates. Assume Job A requires 45 setup hours and 30% of units are inspected; assume Job B requires 80 setup hours and 50% of units are inspected. [8 marks] d) Discus the three different allocation methods (plant wide rate, departmental rates, and activity-based rates), highlighting advantages and disadvantages. What would you recommend to the company? (max 800 words) [8 marks] (Total of 30 marks)