QUESTION 4

MUSHANDIKE Silverware Products Limited is a leading manufacturer of silver picture frames. The company used a traditional costing system to allocate production overheads to products using machine hours.

The newly appointed financial controller believes that activity based costing would provide a better allocation of production overheads to products than the current system. You are provided with the following total production overheads for the last period recorded by the cost accounting system.

$

Utility costs related to machine hours189,000

Production set up costs120,000 Cost of ordering materials18,000

Cost of handling materials33,000

Details of the three models of products and relevant actual information for the last period are also provided as follows.

Model 1 Model 2Model 3

Number of production runs

172518

Number of material orders

203040

Number of material requisitions

3010070

Units produced

1,0002,0002,500

Machine hours per unit

11.52

Direct labour hours per unit ($60 per hour)

0.5 hour1 hour2 hours

Direct material per unit

$10$12$15

YOU ARE REQUIRED TO:

(a) Calculate the unit production cost of each of the three products using (i) The traditional absorption costing, and

(ii) The activity based costing approach respectively.(20 marks) (b) Comment on the calculations in part (a) above and explain why the activity based

costing approach is superior to traditional absorption costing.(5 marks)[Total 25 marks]