QUESTION THREE

$[25]$

Background:

Dookhi $($PTY$)$ Ltd$.$ is a company that prides itself on manufacturing innovative products $-$ TIN and AYE. As the industry undergoes rapid transformation due to advancements in artificial intelligence $($Al$),$ the company finds itself in a fierce competition to maintain its market position. Recent Al enhancements in manufacturing processes across the sector have heightened cost sensitivities and altered consumer expectations. In response to these changes, Ms Eva Rambally, the management accountant, has proposed a review of the costing methods used in the organization. She suspects that the traditional absorption costing method currently employed may not be accurately capturing the cost implications of the new Al$-$driven production processes. Thus, she suggests a shift towards Activity$-$Based Costing $($ABC$)$ for the upcoming financial period of $2024,$

Provided Data:

The following information has been gathered for each product, TIN, and AYE, for the year$-$end budget of $2023$:

$\backslash$table$[[$Products$,,$TIN,AYE$],[$Direct material per unit $($Rands$),,180,210],[$Direct labour cost per hour $($variable$),,150,150]]$

Notes:

Budgeted Production Volume:

Planned production stands at $50,000$ units of TIN and A higher volume of $80,000$ units is forecasted to meet anticipated market demand for AYE.

$2.$ Direct Labour Hours

Each unit of TIN requires $1$ hour of direct labour, reflecting a streamlined assembly process; while AYE requires $2$ hours of direct labour per unit, indicating a more labor$-$intensive construction. This has remained unchanged, and the budgets are based on this ratio.

$3.$ Machine Usage

The production of each unit of TIN is estimated to use $0\mathrm{.}5$ machine hours, integrating efficient Al technology. While each unit of AYE utilizes $1$ machine hour, due to the complexity of the product and precision required by the humanoid robots.

$4.$ Batch Production Strategy:

The production is structured into $625$ batches of TIN, allowing for manageable production runs and quality checks. AYE is scheduled into $160$ batches, optimizing the use of machinery and labor resources.

$5.$ Machine Setup Instances:

There are $3$ machine setups per batch required for TIN for every $5$ machine setups per batch of AYE: a reflection of the product's complexity and the need for varied configurations.

$6.$ Quality Assurance:

Two inspections are conducted for each batch, leveraging advanced Al diagnostic tools for quality control. Four inspections per batch, indicative of the stringent quality standards and the intricate nature of the product.

The total overhead costs associated with different activities are:

$\backslash$table$[[$Activity pools,Amount $($R$),$Cost drivers$],[$Machine maintenance,$8736000,$Number of machine hours$],[$Machine setups,$6600000,$Number of machine setups$],[$Inspection $/$ Quality control,$2721600,$Number of inspections$],[$Total overheads,$18057600,]]$

Required:

Cost Calculation

a$.$ Calculate the total cost per unit of TIN and AYE using the traditional absorption costing method. This method applies the total overhead costs based on labour hours.

$(6)$

b$.$ Recalculate the total cost per unit for TIN and AYE using Activity$-$Based Costing $($ABC$).$ To do this, assign overhead costs to products based on the actual activities incurred $($machine maintenance based on machine hours, machine setups, and inspections$).$

Cost Analysis:

a$.$ Discuss why there might be a difference in the costs calculated by the two methods.

$(4)$

Provide all calculations and explanations clearly. Remember to justify any assumptions made for the calculations.