SECTION A: COMPULSORY QUESTION 1: (40 MARKS) PART A (28 MARKS) Smart Books produces a range of notebooks and diaries that are sold exclusively online via the company's website. Customers have the opportunity to customise their purchase by selecting designs for the front and back covers of the notebooks or diaries. The company currently uses a traditional overhead absorption costing 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 ten years ago. The managing director is 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 is of the opinion that the company should adopt 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 costs depend on the number of setups 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 costs Ordering costs Design expenses Artwork Dispatch costs 7,200 28,500 17,250 10,800 Activity drivers Number Total orders received 48,000 Total design consultation emails 356,250 Total artwork setups 115,000 Total packets dispatched 90,000 Total machine hours 21,250 Details of two orders received Order reference Direct materials (paper, binding, etc.) Notebook KJ34 Diary XT501 1.86 1.24 Direct labour 0.52 0.68 Machine hours required 0.20 0.30 Number of design consultations 3 5 Number of artwork setups required 4 8 REQUIRED: (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. (16 marks) (4 marks) (c) Outline three benefits of ABC and highlight some of the implementation issues that the company may face during the implementation phase. (8 marks)