Question 2 The management of Vegetarian Meals Ltd, who make three main product lines of ready-made vegetarian meals in batches for the restaurant trade, are reviewing the cost accounting policy in relation to overheads. Currently the company absorbs overheads on the basis of direct labour hours. Some of the management board feel that the company should switch to activity-based costing (ABC), as the product lines make different demands on the company's overhead resources - in particular, the Mexican Bean Feast product line requires a lot of advance soaking of a wide variety of raw beans and pulses, peeling and preparation and so on. You have been asked to demonstrate the difference between the existing and the proposed method of dealing with overheads. The following information is available to assist you: Mexican Bean Italian Vegetarian Middle Eastern Feast Pizza surprise Material (12 per kilo) 36.00 18.00 24.00 Labour (9 per hour) 9 18 13.5 Machine hours per unit 6 minutes 12 minutes 6 minutes Units per batch 40 60 Sales price 63.00 58.00 60 60.00 Sales demand 3,200 3,600 4,500 Overhead costs: Machine related 74,600 driven by machine hours Quality testing 17,045 driven by number of units Machine set-up costs 54,825 driven by number of batches Material movements 60,100 driven by number of kilos a) Calculate the profit or loss on each product using traditional overhead recovery (plantwide rate using direct labour hours as a base) and assuming normal absorption costing. (10 marks) b) Calculate the profit or loss on each product using ABC overhead recovery and normal absorption costing. (10 marks) c) Explain if Vegetarian Meals Ltd should replace its existing traditional costing system with activity-based costing? (5 marks) Page 3 of 6