Question 4 The Gong Ltd manufactures two models of specific product, model A and model B. The company sets the budget for manufacturing overhead costs $551,250 and allocates the costs to both products based on direct labour hours. The company provides the costs of the product as follows: Model A Model B Direct material cost per unit $4.50 $5.00 Direct labour cost per unit $9.00 $4.50 Direct labour hours 14,000 2,500 Units produced 35,000 10,000 After attending a seminar on ABC costing the manager of the Gong Ltd starting to believe that the current system to allocate the overhead cost is inaccurate. The manager considered using the Activity Based Costing approach. After making an analysis, it was found that factory overhead was made up of five separate activities as summarised below: % of total Activity Cost pool Activity Cost Driver Allocation overhead costs Model A Model B Production set-ups 10% Number of production runs 5 10 Machining 30% Machine hours 7,500 5,000 Materials purchasing 24% Number of purchase orders 20 Inspection 22% Inspection hours 3,500 3,850 Materials handling 14% Number of materials requisitions 30 60 100% 50 (6 marks) Required (show your calculation) (a) Calculate manufacturing costs per unit for each product under a simple method using direct labour hours to base the Overhead rate. (b) Calculate manufacturing costs per unit for each product under Activity Based Costing. (c) Which method do you recommend and why? (14 marks)