Question#01: (1+6=7) (a) Activity based costing may supplement rather than replace a company formal cost accounting system. Do you agree? Explain in short. (b) Alex ltd manufactures high quality pens. For many years the company manufactures only one type of pen(Namely, ball point) but last year the company also began to manufacture fountain pen. The decision to begin manufacturing fountain pens was taken only after the company's marketing manager confirmed that there was a significant niche market for fountain pen and the company's cost accountant estimated that the cost of production for such pens would be much less than the selling price predicted by the marketing manager. When the fountain pen was introduced sales(In terms of both quantity and price) were higher than expected. Nevertheless, the overall profits of Alex Itd have declined steadily. As a result, the cost accountant decided that he should re examine his estimate of the cost of producing the fountain pen with particular reference to overhead costs. The following data is available for the most recent month. Direct cost of production per unit of each product: Ballpoint pen Fountain pen Direct material cost $11.25 $18.75 Direct labor cost $2.5 $5.00 Number of units of each product produced and sold: Ballpoint pen Fountain pen Units produced and sold 32000 4000 Manufacturing overhead costs for the month: Activity cost pool Activity measure cost Machine running costs Machine hours $91000 Stores requisitions Number of requisitions $189500 Materials movements Number of movements $67500 Production set-ups Number of batches $102000 total $450000 Activity levels in relation to each product: Activity Ballpoint pen Fountain pen Machine hours 7500 10000 Number of requisitions 500 500 Number of movements 325 125 Number of batches 50 25 total 17500 1000 450 75 Requirement: i. Calculate the activity rate using ABC system ii. Calculate the Manufacturing overhead cost per unitfor each pen using ABC system. iii. Calculate the product cost per unit' for each pen using 'ABC' system