QUESTION FIVE Trimake Ltd manufactures a range of electronic car components according to their customer's specifications. One division specialises in the production of air-conditioning units. The existing cost accounting system establishes a predetermined overhead absorption rate on the basis of total budgeted production overhead and direct labour hours. The total budgeted production overhead is estimated to be 95,400. Total budgeted direct labour hours are estimated to be 36,000. The division manager, Mr Barry has been on a course about activity- based costing and he is keen to apply his new knowledge to Trimake Ltd. Mr Barry has received a request to provide an estimate for 60 air-conditioning units. The estimated requirements of order R4565 are as follows: Direct labour hours Machine hours Material purchase orders Shipments 120 30 2 1 Direct labour is paid at a basic rate of 8 per hour. Each unit will require 2 kilos of aluminium which costs 12 per kilo. The activity-based costing system would use three activity cost pools - materials handling, machine related and shipping. Budgeted production overhead costs and expected activity as are follows: Activity Material handling Cost Pool 36,000 Quantity of Cost Driver 1,000 orders 27,200 1,200 machine hours Running machinery 32,200 220 shipments Shipping REQUIRED: (a) Using the existing cost accounting system, calculate the R4565 order cost, the unit cost and the profitability per unit if the selling price is 100 per unit. (14 Marks) (b) Using the activity-based cost accounting system, calculate the R4565 order cost, the unit cost and the profitability per unit if the selling price is 100 per unit. (20 Marks) (c) Comment on your findings and discuss briefly whether Trimake Ltd should change its present policy on overhead absorption, stating reasons to support your conclusion (8 Marks) (d) Outline two changes in the business environment that have led to activity-based (8 Marks) costing becoming more prevalent. (TOTAL: 50 MARKS) Page 6 of 6