Watch-It Ltd ("Watch-If) started off as a small family business a few decades ago and has grown into a successful company that manufactures and sells wrist watches (watches" or "units") in South Africa. A large part of the production process involves manual handwork and the watches are made in relatively small quantities, resulting in a "personal touch" and exclusivity that provides Watch-It with a competitive advantage. Watch-It uses an absorption costing system; applies the first-in-first-out (FIFO) method to value all its inventories; and has a 31 March year-end. Watch-It has decided to change its absorption costing method from traditional absorption costing to activity-based costing (ABC) as from 1 April 2022. Although all Watch-It's watches are analog watches (with "hands" and not with a digital display), Watch- It produces two product types: a traditional-design watch ("Classic") and a contemporary-design watch ("Fashion"). The main components of any watch made by Watch-It are one buckle, one leather strap. one case, and two hands. Except for normal losses already included in the production costs stated below, no other losses occur in the manufacturing process. No opening or closing inventory of any materials or work-in-progress exists at the beginning or the end of a period. 1. EXTRACTS FROM REVENUE, COST AND UNIT INFORMATION FOR THE 2022 FINANCIAL YEAR: 1.1. Watch-It's actual production costs for the period were as follows: Cost item Note Classic (R per watch) Fashion (R per watch) Buckle 1.1.1 200 ? Leather band 1.1.2 ? ? Case 300 240 Two hands 1.1.3 ? ? Total of direct labour and variable 280 318 manufacturing overheads Fixed manufacturing overheads (FMO) 1.1.4 ? 1.1.1. Both product types use the same type and size of buckle. 1.1.2. Leather straps are hand-made, mainly from a leather band that is pre-cut by the supplier. Each Classic uses 20 centimetres of leather band and each Fashion uses 24 centimetres of leather band. The leather band is bought at R400 per metre. All other materials used in making the leather straps are included in variable manufacturing overheads together with other small watch parts and other variable overheads incurred in the production process. 1.1.3. Classic uses two basic hands at R60 each, whereas Fashion uses two glow-in-the-dark hands at R96 each. There is no price difference between the two hands of a specific type of watch (i.e. a minute hand costs the same as a second hand for a particular product type). 1.1.4. FMO are absorbed based on annual budgeted production units. The predetermined blanket FMO absorption rate was R360 per unit in the 2021 financial year and in the 2022 financial year it was based on budgeted FMO of R3 299 400 for the year and total budgeted production units of 8 460 watches. Actual FMO for the 2022 financial year was R3 010 000. 1.2. Watch-It calculated the following actual variable costing opening inventory values at 1 April 2021 for the purposes of a short-term decision: Classic Fashion Product type Units in inventory Inventory value 50 20 R47 000 R20 000