The Cheese Factory of Namibia (CFN) is a Namibian company that manufactures three types of cheese: Cheddar, Gouda and Cream cheese for the Namibian market. The following information for the forthcoming period has been extracted:

	Products
	Cheddar	Gouda	Cream cheese
Sales and production units	50 000	30 000	40 000
Selling price per unit	N$45	N$40	N$95
Prime cost per unit	N$32	N$32	N$84
Machine department (machine hours per unit)	5	2	4
Processing department (direct labour hours per unit)	7	3	2

Overheads are allocated and apportioned to production departments (including service departments) and are to be recovered in the product cost as follows:

• Machining department: N$1.20 per machine hour
• Processing department: N$0.80 per direct labour hour

You ascertain that the above overheads could be reanalyzed into cost pools as follows:

Cost pool	N$	Cost driver	Quantity for the period
Machining services	399 500	Machine hours	?
Processing services	312 000	Direct labour hours	?
Set-up costs	28 500	Set-ups	570
Order processing	156 000	Customer orders	31 200
Purchasing	84 000	Supplier orders	11 200

You have also been provided with the following estimates for the period:

	Products
	Cheddar	Gouda	Cream cheese
Number of Set-ups	225	225	120
Customer orders	15 200	8 000	8 000
Suppliers' orders	4 200	4 000	3 000

Requirement		Mark
		Sub- total	Total
3.1	Calculate the overhead costs that would be absorbed by the three products if CFN used their current absorption method.	6	6
3.2	Calculate the overhead costs that would be absorbed by the three products if CFN were to apply activity based costing (ABC) principles.	12	18
3.3	Using CFN as an example, compare and contrast traditional absorption and ABC principles and give recommendations to CFN that you see as appropriate supported by appropriate calculations where applicable.	10	28
Note: Show all the necessary workings or steps that are required to reach the answer. Marks are available for these.
Total		28