Question 5

Candy House Limited manufactures several types of candy and snacks. The following information is available for three of their products:

	A	B	C
Selling price per unit	$200	$183	$175
Direct material per unit	$50	$40	$35
Direct labour per unit	$30	$35	$30
Units produced and sold	10 000	15 000	18 000

The total number of activities for each of the three products of the period is as follows:

	A	B	C
Number of purchase requisitions	1 200	1 800	2 000
Number of set-ups	240	260	300

Overhead costs have been analyzed as follows:

Inspecting quality assurance (cost driver is number of purchase requisitions) $1 400 000

Production scheduling and machine set-up (cost driver is number of set-ups) $1 200 000

Required (show your workings for calculations & write in your own words):

(a) Calculate the profit for product B using activity-based costing. (6 points)

(b) Although Activity-based costing is often recommended in textbooks, there are actually very few companies that uses it as its main method. Explain two (2) reasons for this. (4 points)