The Tools Co produces three products, X, Y and Z, all made from the same material. Until now, it has used traditional absorption costing to allocate overheads to its products. The company is now considering an activity based costing system in the hope that it will improve profitability. Information for the three products for the last year is as follows:

X Y Z

Production and sales volumes (units) 7,500 6,400 6,000

Selling price per unit (Omani Rials) 10.50 25 21

Raw material usage (kg) per unit 1.5 2.5 3

Direct labor hours per unit 02 040 03

Machine hours per unit 03 05 06

Number of production runs per annum 42 16 15

Number of purchase orders per annum 26 36 60

Number of deliveries to retailers per annum 40 90 30

The price for raw materials remained constant throughout the year at Omani Rials 420 per kg. Similarly, the direct labor cost for the whole workforce was Omani Rials 1050 per hour. The annual overhead costs were as follows:

Omani Rials

Machine set up costs 16,650

Machine running costs 32,400

Procurement costs 29,000

Delivery costs 23,800

Required:

Calculate the full cost per unit for products X, Y and Z under traditional absorption costing, using direct labor hours as the basis for apportionment. (10 Marks)

Calculate the full cost per unit of each product using activity based costing.

(15 Marks)

Using your calculation from (a) and (b) above, explain how activity based costing may help The Tools Co improve the profitability of each product. (10 Marks)