XZ Chemicals Ltd. produces two major chemicals MLX and XLZ.

The company uses an activity-based costing system with three cost pools.

Budgeted costs and activity levels for the year:

• Process line costs of $1,248,000 consist of all costs required to maintain and run the equipment used to produce the chemicals.
• XZ uses total machine hours for all equipment on the line as the cost driver.
• Total machine hours for the year were 12,000.
• Each production run for the company required between two and four hours to set up the process flow.
• The total cost for the year was $1,092,000.
• The total setup hours were 800.
• A research and development (R&D) team of ZX was on staff to ensure that the process was streamlined and within government guidelines.
• The cost pool consisted of employee salaries, equipment, and testing laboratory costs.
• Total cost for the year was $980,000, which was applied to product lines based on 2,500 hours of R&D time.

The following activities occurred for the year for each product:

MLX XLZ

Total litres produced 100,000 75,000

Litres per batch 1,000 500

Process machine hours per batch 36 56

Setup hours per batch 2 4

Research and development hours 1,500 1,000

Total direct costs $450,000 $600,000

1) Which of the following is the correct cost per litre for each product (rounded to the nearest cent)?

2) If XZ executive team wants to manage its chemical production activities. Which of the following activity-based management (ABM) initiatives focuses on strategic ABM?

• a) The chemical engineers have introduced a new machine into the process that reduces the production run time.
• b) Management is considering changing the product mix to focus on the product that is more profitable.
• c) Based on their knowledge of the setup time, management is considering increasing the number of litres produced in each production run.
• d) Management is considering moving the receiving dock closer to the production area to reduce the amount of movement of raw materials to the production line.