Question 2 Grafton Ltd produces three products: X, Y and Z. The company has been using a single direct labour cost percentage to allocate overhead costs to products. Recently, managers of Grafton have noticed that, due to increasing overbeads and loss of market share, the current costing system is in need of replacement. A specific team has been charged with the responsibility of developing a new system of costing based on activities. Production information is as follows: Production volume Selling price per unit Material cost per unit Labour cost per unit 7,500 units 47 18 12,500 units 80 4,000 units 68.00 16.00 6.40 25 Total overheads for all three products are: Materials receiving and handling Machine maintenance and depreciation Set-up costs Engineering costs Packaging Total 150,000 390,000 18,688 100,000 60,000 718,688 The following information is also provided about the activities involved in the production: 0.5 05 No. of materials movements Machine hours per unit No. of set-ups Proportion of engineering work No. of orders packaged 30% 20% 50% 22 Requirement (a) Calculate the overhead rates and product unit costs for X Y and Z under the existing costing system 3 Marks (b) Using the information provided, decide on the most appropriate cost drivers and allocate the overhead costs accordingly. Calculate product costs for the three products using activity based costing methods to allocate overheads. 12 Marks (c) Critically evaluate activity based costing approaches for allocating overheads. 10 Marks Total 25 Marks