Question 3 IT Express produces a range of notebooks and diaries that are sold exclusively online via the company's website. Customers have the opportunity to personalise their purchase by selecting designs for the front and back covers of the notebooks or diaries. The company currently uses a traditional overhead absorption costing system based on machine hours to allocate manufacturing overheads to products. This year, the company recorded a loss in its financial statements for the first time since it commenced trading six years ago. The managing director is very concerned and has suggested that the prices of all products should be increased by 30%. However, the management accountant has suggested that the problem relates to overhead allocation. Ile has argued for the adoption of activity-based costing. Activity based cost information obtained for the company shows that customers place individual orders and then discuss the design of the notebooks or diaries using emails. The artwork costs depend on the number of setups required to compile the notebook or diary. In addition, the company has a policy of dispatching cach order individually. Financial information relating to the most recent trading period and two orders recently received are provided below. Overhead costs Ordering costs Design expenses Artwork Despatch costs $7,200 S28,500 $17,250 $10,800 Activity drivers Total orders received Total design consultation emails Total artwork setups Total packets despatched Total machine hours 48.000 356.250 115,000 90.000 21.250 Details of two orders received Order reference Notebook KA23 Direct materials paper, binding, etc. $1.86 Direct labour S0.52 Machine hours required 0.20 Number of design consultations 3 Number of artwork setups required Required: (a) Calculate the cost of cach of the orders received using: (i) The existing overhead allocation method; (ii) Activity based Costing (ABC) Diary XY456 S1.24 S0.68 0.30 5 8 4 (5 marks) (10 marks) (b) Critically discuss your answers at (a) (i) and (ii) above. (10 marks) [25 marks)
