Soal 2 (25%) Ashley Co manufactures three products, A, B and C. Demand for products A and B is relatively clastic whilst demand for product C is relatively inelastic. Each product uses the same materials and the same type of direct labor but in different quantities. For many years, the company has been using full absorption costing and absorbing overheads on the basis of direct labor hours. Selling prices are then determined using cost plus pricing. This is common within this industry, with most competitors applying a standard mark-up. Budgeted production and sales volumes for A, B and C for the next year are 30,000 units, 24,000 units and 33,000 units respectively. The budgeted direct costs of the three products are shown below: Product Direct Material Direct labor ($24 per hour) per unit per unit A $50 $60 B $56 $72 $44 $48 The following additional data relate to each product: Product Batch size (units) |No of purchase orders per batch Machine hours per unit A 500 1.5 B 800 5 1.25 C 400 4 1.4 In the next year, Ashley Co also expects to incur indirect production costs of $1,377,400, which are analysed as follows: Cost pools Cost amount Cost drivers Machine set up costs $560,000 Number of batches Material ordering costs $632,000 Number of purchase orders Machine running costs $840,000 Number of machine hours General facility costs $722.800 Number of machine hours $2,754,800 Ashley Co wants to boost sales revenue in order to increase profits but its capacity to do this is limited because of its use of cost plus pricing and the application of the standard mark-up. The finance director has suggested using activity based costing (ABC) instead of full absorption costing, since this will alter the cost of the products and may therefore enable a different price to be charged. Required: (a) Calculate the budgeted full production cost per unit of each product using Ashley Co's current method of absorption costing. (6%) (b) Calculate the budgeted full production cost per unit of each product using activity-based costing. (8%) (c) Compare the cost per unit for each product based on traditional costing and ABC. Which product has considered undercosting or overcosting (3%)? (d) Discuss the impact on the selling prices and the sales volumes of each product which a change to activity based costing would be expected to bring about. (3%) (c) Explain how the information obtained from the activity-based costing system could be used for cost management purposes. (5%)