Question Five

Viola & Drum Ltd produces affordable musical instruments for schools. Aneena Frost, the chief accountant, is reviewingthe company's current approach toallocate overheads to products. Currently the company absorbs overheads based on direct labour hours. Aneena feels that the company should switch to activity-based costing (ABC), as theproduct lines make different demands on the company's overhead resources -in particular, their violinmodel "Stradicrazy" requires a lot of advance preparation. Thefollowing information about their two main product models is available to assist in your calculations:

Materials

Kilos per unit (for wood) Labour hours per unit Sales price

Sales demand

Overhead costs: Employee-related Quality testing

Material movements

StradiCrazy DrumOn (DO) (SC)

36 18 3kgs 1.5kgs

1 2 63 58 3,200 3,600

74,500 Driven by labour hours 17,145 Driven by number of units 60,000 Driven by number of kilos

Direct labour is charged as 9 per labour hour.

Required:

1. a)Calculate the total profit or loss for StradiCrazy and DrumOn using traditional costing.(9 marks)
2. b)Calculate the total profit or loss StradiCrazy and DrumOn using ABC costing. Clearly show your workings.(12 marks)
3. c)Explain the results. Consider in addition whether the introduction of ABC would make sense for the company, and why?(4 marks)