Question 5. Activity Based Costing (15 marks) Clean Paint Pty Ltd manufactures two high-quality base paints: an oil-based paint and a latex paint. Both are housepaint and are manufactured in neutral white colour only. Clean Paint Pty Ltd sells the white base paints to franchised retail paint and decorating stores where pigments are added to tint (colour) the paint as the customer desires. The oil-based paint is made with organic solvents (petroleum products) such as mineral spirits or turpentine. The latex paint is made with water; synthetic resin particles are suspended in the water; and dry and harden when exposed to the air. Clean Paint Pty Ltd uses the same processing equipment to produce both paints in different production runs. Between batches, the vats and other processing equipment must be washed and cleaned. After analyzing the company's entire operations, Clean Paint Pty Ltd accountants and production have identied activity cost pools and accumulated annual budgeted overhead costs by the pool as follows. Activity Cost Pools Estimated Overhead Purchasing $240,000 Processing (weighing and mixing, grinding, thinning and drying, straining) $1,400,000 Packaging (quarts, gallons and 5gallons) $580,000 Testing $240,000 Storage and inventory control $180,000 | Washing and cleaning equipment $560,000 | Total annual budgeted overhead $3,200,000 Following further analysis, activity cost drivers were identied and their expected use by product and activity were scheduled as follows. Expected Use of Drivers per Product Expected Cost D . Activity Cost rivers per P l A ti 't 00 s Cost Drivers c v1 3' Oil-based Latex Purchasing Purchase orders 1,500 orders 800 700 Processing Gallons 1 ,000,000 400,000 600,000 processed gallons Packaging Containers 400,000 1 80,000 220,000 lled containers Testing Numbers of 4,000 tests 2,100 1,900 Tests Storing Avg. gals. On 18,000 gallons 10,400 7,600 hand Washing Number of 800 batches 350 450 batches Clean Paint Pty Ltd has budgeted 400,000 gallons of oil-based paint and 600,000 gallons of latex paint for processing during this year. Instructions a. Prepare a schedule showing the computations of the activity-based overhead rates and a schedule assigning each activity's overhead cost pool to each product (5 Marks). b. Explain the four benets of ABC compared to the traditional costing system in Clean Paint Pty Ltd (5 Marks). c. Compute the overhead cost per unit for each product