Question 7 Cardio Co manufactures two types of fitness equipment: treadmills and cross trainers. The treadmills was introduced several years ago to tap a new segment of the market. Since introduction of the treadmills, the company's profits have steadily declined, and management has become increasingly concerned about the accuracy of its costing system. Manufacturing overhead is assigned to products on the basis of direct labour-hours. For the current year, the company has estimated that it will incur 1,200,000 in manufacturing overhead cost. Cardio Co's accountant has produced the following analysis. Treadmills Cross trainers Total Annual output (units) 5,000 1.000 6,000 Direct materials cost 100,000 20,000 120,000 Direct labour cost 40,000 10,000 50,000 Direct Labour-hours 20,000 5,000 25,000 Management is considering using activity-based costing to apply manufacturing overhead cost to products. The activity-based costing system would have the following three activity cost centres: Activity cost pool Cost Driver Estimated overhead cost Purchasing Purchase orders issued 200,000 Processing Machine-hours 400,000 Shipping Number of shipments 600,000 1,200,000 Activity cost pool Purchasing Processing Shipping Cost driver for each product (Activity level) Treadmills Cross trainers Total 2,000 2,000 4,000 3,000 2,000 5.000 500 1,000 500 Required: a) Calculate the total costs for each product using traditional overhead recovery (plant-wide rate using direct labour hours) and assuming normal absorption costing. (8 marks) b) Calculate the total cost for each product using activity-based costing (ABC). (11 marks) c) Discuss the advantages and disadvantages of using Activity-based costing (ABC) (6 marks)