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Question 5 Valensi Ltd manufactures three types of skincare product for sale to retailers. The company currently operates a conventional absorption costing system. Budgeted information

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Question 5 Valensi Ltd manufactures three types of skincare product for sale to retailers. The company currently operates a conventional absorption costing system. Budgeted information for next year is given below: Anti-acne Body Cleansing agent butter clay Direct materials cost per unit 2.84 2.68 1.94 Direct labour cost per unit 0.90 0.68 0.54 Machine processing time per unit (minutes) 2 3 Annual production and sales volume (units) 1,000,000 1,200,000 600,000 Selling price per unit 10.00 12.00 13.33 Fixed production overheads amount to 15.04m annually and are currently assigned to products using an absorption rate per machine processing minute. The Chief Management Accountant at Valensi Ltd is proposing that the company should switch to a system of activity-based costing. Five principal activities and their associated cost drivers and cost pools have been identified as follows: Activity Machine programming and calibration Product quality control Product processing Procurement and purchasing Product packaging Total production overheads Cost driver Number of machine set-ups Number of quality inspections Number of processing minutes Number of purchase orders Number of units sold '000 3,300 1,200 5,600 1,440 3,500 15,040 Further details have been ascertained as follows: Production batch size (units) Number of machine set-ups required per batch Number of purchase orders placed per batch Number of quality inspections carried out on each batch Anti- Body Cleansing acne butter clay agent 1,000 2,000 1,500 4 2 2 2 1 10 8 N | Required: a) Calculate the full cost per unit of each product using the current absorption costing system, using machine processing minutes as the basis for absorption. (5 marks) b) Calculate the full cost per unit of each product using the proposed activity-based costing (ABC) system. (14 marks)

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