Tuka Pty limited is a company based in Lusaka that was started 20 years ago by two brothers. The company manufactures four similar products produced on the same production machinery.

The company has been undergoing a drop in profits in recent years due to increased completion in the sector in which the company operates. At a recent board meeting, the board chairman suggested that the company may be losing business to its competitors due to inaccurate product cost information that management is using to set product prices. As such, he has suggested that the company considers the introduction of Activity Based Costing to assist management in improving its product pricing systems.

The company uses a profit margin of 20%, to price its products.

In order to facilitate the change in costing systems, the cost Accountant has collected the following information related to the four products for the previous period:

ABCD

Budgeted total units for period240200160240

Number of production runs1210812

Number of stores requisitions raised40404040

Number of sales orders received24201624

Materials cost per unitK50K60K40K70

Labour cost per unitK3831K24K31

Machine hours per unit4323

The production overheads are currently absorbed using a machine hour rate, and the total of the production overheads for the last period have been analysed as follows:

ActivityTotal costCost driver

K

Machine related activities20,800Machine hours

Set up costs10,500Number of production runs

Stores receiving7,500Requisitions raised

Inspection4,500Number of production runs

Material handling and dispatch8,200Orders executed

Required:

(a) Calculate the selling prices for the four products using the current system of accounting for overheads that was in use in the last period.

(10marks)

(b) Calculate the selling prices for the four products if an Activity Based Costing system was the system in use.(10 marks)

(c) Advise management whether they should change to an Activity Based costing system based on your answers in (a) and (b) above.(6 marks)

(d) List four factors that should be taken into account both internal as well as external in a decision to adopt an Activity based costing system.(4 marks)

(e) Explain the factors that should be considered when selecting a cost driver.

(4 marks)

(f) Explain three potential benefits and three potential problems that may arise as a result of a change from the current system to an Activity based costing system.

(6 marks)