YaiBa Ltd produces three products AA, BB, and CC. Accountants accumulate all overhead in a single cost pool and allocate it based on direct labour hours. Management is considering that the current overhead allocation may not be accurate. Thus, they decided to begin implementing an activity-based costing system and obtained the following information:

Product Total

AA BB CC

Sales () 210,000 170,000 90,000 470,000

Total direct costs () 142,000 67,300 31,900 241,200

Overhead 101,800

Operating profit () 127,000

Total Direct Labour Hours 23,000 24,000 3,900

Number of set-ups 23 9 48

Number of material orders 3 2 5

Number of times material handled 4 9 7

Number of inspection hours 80 45 200

The following information regarding manufacturing overhead is collected:

Activity Overhead cost

Set-up 39,500

Ordering materials 24,320

Handling material 5,480

Inspection 32,500

Total 101,800

Required:

a) Calculate the total operating profit for each product using the current method. (4 marks)

b) Calculate the total operating profit for each product using activity-based costing. (13 marks)

c) Explain two of the potential benefits to the company of using an activity-based costing system. (3 marks)