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: B D A B 240 200 160 240 12 10 8 12 Budgeted total units for period Number of production runs Number of stores requisitions raised Number of sales orders received Materials cost per unit 40 40 40 40 24 20 16 24 K50 K60 K40 K70 Labour cost per unit K38 31 K24 K31 Machine hours per unit 4 3 2 3 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: Activity Total cost Cost driver K Machine related activities 20,800 Machine hours Set up costs 10,500 Number of production runs Stores receiving 7,500 Requisitions raised Inspection 4,500 Number of production runs Material handling and dispatch 8,200 Orders 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. (10 marks) (6) 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 (6) 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) () Explain the factors that should be considered when selecting a cost driver. (4 marks) (1) 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) 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: B D A B 240 200 160 240 12 10 8 12 Budgeted total units for period Number of production runs Number of stores requisitions raised Number of sales orders received Materials cost per unit 40 40 40 40 24 20 16 24 K50 K60 K40 K70 Labour cost per unit K38 31 K24 K31 Machine hours per unit 4 3 2 3 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: Activity Total cost Cost driver K Machine related activities 20,800 Machine hours Set up costs 10,500 Number of production runs Stores receiving 7,500 Requisitions raised Inspection 4,500 Number of production runs Material handling and dispatch 8,200 Orders 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. (10 marks) (6) 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 (6) 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) () Explain the factors that should be considered when selecting a cost driver. (4 marks) (1) 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)