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QUESTION NO 2: CASE ON PRODUCTION CYCLE: [15] NIVA books DAC produces a range of notebooks and diaries that are sold exclusively online via the company's website. Customers have the opportunity to personalize their purchase by selecting designs for the front and back covers of the notebooks or diaries. The company currently uses traditional overhead absorption system based on machine hours to allocate manufacturing overheads to products. This year the company recorded a loss in its financial statements for the first time since it commenced trading six years ago. The managing director is ACCOUNTING INFORMATION SYSTEM Final Assessment Time: 1 Hour 20 minutes NAME: ID: Sec: very concerned and has suggested that the prices of all products should be increased by 25%. However the management accountant has suggested that the problem relates to overhead allocation. He has argued for the adoption of activity based costing. Activity based cost information obtained for the company shows that customers place individual orders and then discuss the design of the notebooks or diaries using emails. The artwork cost depends on the number of set ups required to compile the notebook or diary. In addition the company has a policy of dispatching each order individually. Financial information relating to the most recent trading period and two orders recently received are provided below: Overhead cost Ordering cost Design expenses Artwork Dispatch cost Total TK 14,400 Tk 57,000 TK 34,500 Tk 21,600 Tk 127,500 Activity drivers Total order received Total design consultation emails Total artwork setups Total packet dispatched Total machine hours 96.000 712,500 30,000 180,000 42,500 Details of two orders received Order reference Direct materials-paper bindings Direct labor Machine hours required Number of design consultations Number of artwork setups required Notebook K134 Tk 3.72 Tk 1.04 0.40 6 8 Diary XT501 Tk 2.48 TK 1.36 0.60 10 16 Requirements: a. Calculate the cost of each of the orders received using (i) The existing overhead allocation method (ii) Activity based costing (ABC) b. Comment briefly on your answers at (a) (i) and (ii) above