The finance team have just arrived from an executive course and have learnt that activitybased costing is more accurate than applying overheads using direct labour 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 governments 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 13 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 labour hours at the moment. The expected direct labour cost is R2 500 000 and the total budgeted direct labour hours are 18 334 hours. The above-mentioned labour costs are considered a variable cost. The license cards cost R25 per card. Each card requires six minutes of labour. Packaging is R5 per card.

Using direct labour hours as the base for applying manufacturing overhead cost to products, undertake the following:

1 c) Discuss whether you agree with direct labour 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.