Required: Francesco, the CEO of Motor LTD, became passioned about understanding costing and overhead allocation. During a meeting with Motor LTD management team, he affirmed "Indirect costs are fixed cost that must carefully understood. They are likely to increase when the process of manufacturing a product is more complex. Fortunately, our costing system calculates the products contribution margin so that we can monitor the number of units that we need to sell to cover our overheads. Activity-based costing will lead to an immediate overall cost reduction. We will also understand better how and where we are adding value to our customers, and it would be easier for us to perform any business process reengineering. Overall under-costing is not a threat for us, only over-costing is. And with activity-based costing we will also improve tracing direct cost to our products. To conclude, I would encourage you to apply activity-based costing in all our business no matter what". Prepare a succinct critique of Francesco's statement highlighting what you agree and disagree with, and why (maximum 1000 words total).

Motor Ltd. is a company specialised in manufacturing and selling car battery chargers. The manufacturing process involves two main departments: Department A deals with battery assembly and Department B deals with pack mounting. Motor Ltd. (1) currently uses a plant-wide overhead rate based on direct labour hours for allocating overhead costs. For the current quarter, the budget includes 130,000 for overhead costs, 24,000 for direct labour costs in Department A (battery assembly) paid at 16 per hour, and 60,000 for direct labour costs in Department B (pack mounting) paid at 12 per hour. Motor Ltd. is workina on two iobs which require the followina insuts: The number of units produced for Job X is 1,000 , while for Job Y is 900. Motor Ltd. has hired Giulia, a new management accountant, who suggests replacing the current allocation system based on a plant-wide rate with (2) departmental overhead rates where assembly overhead of 64,000 is allocated based on machine hours ( 16,000 hours) and pack mounting overhead of 66,000 is allocated based on pack mounting direct labour hours. Based on her experience in the industry, Giulia suggests also to implement an (3) activity based costing system, taking into account that the company is growing and the complexity of the business is increasing. Giulia has identified the following activities, their estimated cost for the quarter, their cost drivers and cost driver quantities for the quarter included in the 130,000 overheads