QUESTION 6 (20 Marks)

Using the information provided below, answer the following questions (Round of calculated values to two

decimal places).

INFORMATION

Three variants of a popular brand of washing machines - A101, A102, and A103 - are manufactured by Harmonium

Limited from the same materials. Until now, the company has used traditional absorption costing to allocate overheads

to its products. The recently appointed chief financial officer (CFO) is considering an activity-based costing system in

the hope that it will improve the costing of activities and, thus, enhance profitability.

The following data on the three products for the previous financial year has been extracted from the books of the

company:

Product variants A101 A102 A103

Production and sales volume (units) 30 000 25 000 35 000

Raw materials usage (kg) per unit (@R2500 per kg) 3 2 4

Direct labour hours per unit (@ R30 per hour) 1.5 2.0 3.0

Machine hours per unit 8 6 11

Number of production runs per annum 13 15 10

Number of purchase orders per annum 25 24 30

Number of deliveries to retailers per annum 45 40 50

An activity-based investigation identified the following cost pools and their annual overhead costs:

Cost pools: R

Machine setup costs 1 141 351

Machine running costs 2 854 452

Procurement costs 2 063 460

Delivery costs 2 340 737

Required:

6.1 Calculate the full cost per unit of the three variants of the washing machines - A101, A102, and A103 -

under traditional absorption costing. Use direct labour hours as the basis of the apportionment.

(5 Marks)

6.2 Using the activity-based costing method, calculate the full cost per unit of the three variants of the

washing machines - A101, A102, and A103.

(12 Marks)

6.3 On the basis of the calculations in 6.1 and 6.2 above, explain whether activity-based costing is capable

of helping Harmonium Limited to improve the profitability of each variant of the washing machine.

(3 Marks)

END OF PAPER