Question 4 (Activity Based Costing) Tidy Hair Ltd, manufactures two products that help create sensational hair styles at affordable prices. The two products are: the Curler Kirl and the Straightener 'Strayt'. These two products can be sold separately or together. The company has traditionally allocated its production overhead costs on the basis of direct labour hours used in the manufacturing department (assembly line hours). Direct labour costs 9 per hour. The company is now considering using Activity Based Costing. Details of overheads and drivers are as follows: Production overheads: Total cost Cost driver 300,000 Assembly line hours 270,000 Number of inspections Manufacturing Inspection Set-ups Total production overheads 340,000 Number of set-ups 910,000 You have obtained the following information about the planned production over the coming year: Planned Production Kirl Strayt Total Number of units to be produced 125,000 90,000 Per unit 9 13.5 Assembly line labour costs per unit Assembly line hours per unit 1 1.5 Direct materials per unit 13 15 For total production Number of set-ups 1,000 400 1,400 Number of products in a batch 500 750 Number of inspections per batch 4 3 Required: (a) Calculate the product cost per unit for each of Kirl and Strayt using Traditional Absorption Costing, recovering overheads using direct labour hours. Round costs per unit to the nearest penny. (6 marks) (b) Calculate a product cost per unit for each of Kirl and Strayt using Activity Based Costing. Round costs per unit to the nearest penny. (16 marks) (c) The selling price for the products Kirl and Strayt are 28 and 33 respectively. Discuss why there are differences in cost per unit and explain the impact on the resultant profit per unit. (10 marks) (d) The company anticipates that competition will remain high in the industry and is, therefore, considering the implementation of 'Target Pricing' to replace their 'Cost-plus' system currently in use. Explain how this change could affect the returns to shareholders. (8 marks) Total 40 marks