Question 3 (Total: 25 marks)

Sikawan Systems manufactures two products in its Sabah division. Traditionally the company has used an overhead absorption system based on machine hours. However, following a management consultancy exercise in which outside consultants reviewed the management information systems, the directors have decided to pilot an Activity Based Costing system at the Sabah division. For the coming year, 2021, Sabahs production overheads are estimated as follows:

	RM
Factory rent and rates	42,200
Heat and light to factory	23,950
Factory insurance	7,100
Supervisory salaries	38,540
Other indirect labour	18,030
Canteen charges	6,100
Machinery depreciation	18,000
Machinery maintenance	5,520
Production consumable (e.g. machine oil)	2,050
Other factory costs	7,480
TOTAL	168,970

Following a detailed review of the production processes, the finance director and the divisional accountant identify a set of key cost drivers, together with cost allocations to each, and estimates of the relevant quantities involved for products A and B in the 2021 financial year:

Activity	Cost driver	Total	Product A	Product B	Total cost per cost driver RM
Planned units of production			6,000	5,000
Machining	Machine hours	11,000	6,000	5,000	63,030
Assembly	Labour hours	9,000	3,000	6,000	43,020
Packing	Labour hours	4,000	2,000	2,000	31,000
Materials ordering	No. of orders	111	86	25	9,990
Materials issues	No. of issues	150	103	47	12,000
Machine set up	No. of hours used in set up	33	25	8	5,940
Quality inspection	No. of inspection	35	10	25	3,990
TOTAL					168,970

Each planned unit of production of both product A and product B uses one machine hour. One unit of A has a prime cost of RM12.50, while one unit of B has a prime cost of RM16.

Required:

a) Calculate the overhead absorption rate based on the companys traditional system of using machine hours as a basis for overhead absorption. (3 marks)

b) Calculate the overhead per unit of product A and product B using the data provided for the new Activity Based Costing system. (12 marks)

c) Calculate the production cost of one unit of product A and one unit of product B under both the old and the new costing systems. (6 marks)

d) Comment on the difference between the production costs for each product under the old and the new costing systems. (4 marks)