Requirements: (a) Calculate the cost per unit of the Basic and the Deluxe, assuming all manufacturing overheads are allocated based on direct labour hours. (b) Calculate the cost per unit for the Basic and the Deluxe using Activity Based Costing. (c) From the data you have developed from Requirements A and B, identify and discuss any factors which may account for the company's declining profits. (d) Describe the principal deficiencies in the traditional product costing system which ABC seeks to correct, and why it may be a more appropriate costing method in today's environment. Issue two: May tells you that the company has been concerned that they have been inaccurately costing their products. They have decided to pilot an ABC system at one of its factories. The factory produces a product that is available in both a deluxe model and a basic model. The company has manufactured the basic model for years, but introduced the deluxe model serval years ago in order to tap a new segment of the market. Since introduction of the deluxe model, the company's profits have steadily declined and management have become increasingly concerned regarding the accuracy of its costing system. Interestingly, sales of the deluxe model have been increasingly rapidly. Currently manufacturing overhead is assigned to the products based on direct labour hours. For the current year, the company has estimated that it will incur E800,000 in manufacturing overhead cost and will produce and sell 5,000 Deluxe models and 40,000 Basic models. The Deluxe model requires 2 hours of direct labour time per unit, and the Basic model requires 1 hour of direct labour time per unit. Material and Labour costs per unit are as follows: Deluxe Basic Direct Materials E30 E15 Direct Labour E16 E8 The following information has been obtained in a bid to develop an Activity Based Costing System. Manufacturing overhead costs: Activity Cost Pool Activity Measure Estimated Overhead Cost Purchasing Purchase Orders Issue E186,000 Processing Machine Hours (140,000 Scrap/rework Scrap/rework orders issued E358,800 Shipping Number of shipments E115,200 Total: E800,000 Estimated Activity levels by product Activity Measure Deluxe Basic Total Purchase orders issued 200 400 600 Machine Hours 20,000 15,000 35,000 Scrap/rework orders issued 1,000 1,000 2,000 Number of shipments 250 650 900