The finance team has just arrived from an executive course and has learned that activity-based costing is more accurate than applying overheads using direct labor hours as they have done in the past. They have therefore decided that this should be investigated before the arrival of the new machine.

The following fixed overhead cost information was compiled by the government costing analyst:

Cost Pool	Cost	Cost driver
Ordering	R330 000	Purchase Orders
Material handling	R655 000	Number of set-ups
Processing	R1 545 000	Processing hours
Packaging	R770 000	Packaging Hours
	R3 300 000

	License cards
Planned production and sales	80 000 cards
Number of setups	32 setups
Purchase order size	20 000 cards
Processing hours	15 000 hours
Packaging time	2 400 hours

The budget for the coming year includes fixed production overhead costs of R3 300 000. Production overheads are applied using direct labor hours at the moment. The expected direct labor cost is R2 500 000 and the total budgeted direct labor hours are 18 334 hours. The above-mentioned labor costs are considered variable costs.

The license cards cost R25 per card. Each card requires six minutes of labor. Packaging is R5 per card.

Cost and Management Accounting (Individual work)

1. Using direct labor hours as the base for applying manufacturing overhead cost to products, undertake the following:
   1. Calculate the predetermined overhead rate that will be used during the upcoming year.
   2. Calculate the unit product cost of one license card
   3. Discuss whether you agree with direct labor hours being used as a base to apply manufacturing overheads. Should you not agree, recommend a more appropriate traditional base for the Government to use.
2. Using activity-based costing as a basis for applying manufacturing overhead cost to products, calculate the total amount of manufacturing overhead cost assigned to the license cards for the year.
3. The most critical step in activity-based costing is identifying cost drivers. Define a cost driver and briefly discuss whether you agree with this statement

or not.

Additional information required In addition to the license cards, the department offers temporary license cards:

Temporary License cards:

Planned production and sales: 12 000 cards

Number of setups: 25 setups

Purchase order size: 7 000 cards

Processing hours: 8 000 hours

Packaging time: 800 hours