The following budgeted information relates to Gloss and Boss, an industrial plastics producer. The company produces 3 different products and budgeted figures for the forthcoming period are:

	Red	Blue	Green
Sales and production (units)	40,000	35,000	35,000
	()	()	()
Selling price (per unit)	48	92	80
Prime cost (per unit)	34	80	64
	Hours	Hours	Hours
Machine department (machine hours per unit)	2	5	4
Assembly department (direct labour hours per unit)	7	3	2

Overheads allocated and apportioned to production departments (including service cost centre costs) were to be recovered in product costs as follows:

Machine department at 1.30 per machine hour;

Assembly department at 0.83 per direct labour hour

The above overheads could be re-analysed into cost pools as follows:

Cost pool		Cost driver	Quantity for the period
Machining services	395,000	Machine hours	395,000
Assembly services	273,000	Direct labour hours	455,000
Set-up costs	19,000	Set-ups	450
Order processing	131,150	Customer orders	26,230
Purchasing	73,000	Supplier orders	10,000
	891,150

Additionally, the following estimates have been calculated for the period:

	Products
	Red	Blue	Green
Number of set-ups	108	171	171
Customer orders	5,246	7,869	13,115
Suppliers' orders	2,700	3,550	3,750

Question 3 Continues on Next Page

Required:

(a) Prepare profit and loss statement, showing profit per product and total profit, using:

(i) conventional absorption costing

(5 marks)

(ii) activity-based costing

(10 marks)

(b) Which of the two cost bases do you think the company should use? Explain your answer with reference to your calculations for part a, and the subsequent impact upon profit.

(5 marks)

(c) Implementing new costing systems in an organisation can be challenging. Critically evaluate the potential obstacles.