You are the management accountant of Freeze It (Pty) Ltd, a manufacturer of fridges for restaurants and supermarkets. In an attempt to improve its share of the competitive refrigeration market, the company has recently completed a major investment in order to automate several aspects of its manufacturing and information technology departments. Freeze It has three departments involved in mainstream manufacturing (fabrication, assembly and painting) and two support departments (training and procurement). The company uses an absorption costing system for internal and external reporting purposes. You have prepared the following budgeted information for 2021: R 240 000 Electricity Depreciation of Machines Insurance of Buildings Maintenance of Machines 1 200 000 90 000 850 000 2 380 000 TOTAL Additional Information Fabrication Assembl Painting Training Procurement TOTAL Direct Labour Hot 4 000 5 000 4 500 500 1 000 15 000 Maintenance Hou 2 000 4 500 3 400 50 50 10 000 Value of Direct Materials Consun R10m R1,1m R2m RO,2m RO.2m R13.5m 3 600 2 800 180 420 12 000 Megawatt Hours 5 000 Book Value of R7,5m Machines R3,5m R7m R0,5m R1,5m R20m 1 000 1 800 250 250 4 000 Floor Area 700 Machine Hours 7000 6 000 5 000 0 500 18 500 The in-house training department is responsible for improving skills and training courses are arranged so that the training budget is spent equally between the three production departments. A customer has approached the company to quote on the manufacture of the T42, a new specialised solar panel fridge. The prime costs of the T42 is R15 000 and the product will spend ten, twelve and seven hours respectively in the fabrication, assembly and painting departments. As the new T42 is a new product, there is limited demand for the product. In order to undertake a comparison between ABC and the current cost method, you have obtained the following information relating to the production of the T42: ACTIVITY BASED CA TOTAL COST FORT NUMBER OF POOL YEAR ACTIVITIES NUMBER OF EACH ACTIVITY REQUIRED FOR MODEL 142 R 480 000 150 1 Product Design Fabrication R 750 000 650 3 Material Handling R 240 000 500 1 Painting R 500 000 650 3 Assembly R 410 000 650 3 TOTAL R2 380 000 YOU ARE REQUIRED TO: 1. Draft a memorandum to the managing director discussing: a) Three benefits of utilising an ABC System b) Three specific motivating factors why the company should use ABC for costing purposes. (13) 2. Calculate the overhead recovery rate per department based on the traditional method (using machine hours). (20) 3. Calculate the over/under recovery for the Fabrication department assuming the actual operating hours and actual overheads for the financial year were as follows: Actual Total Labour Hours - 4 200 hours Actual Total Machine Hours - 6 500 hours Actual Total Overhead Costs - R790 000 Explain how the amount calculated will be treated in the financial records of Freeze (Ply) Ltd (5) 4. Calculate the production cost of Model T42 using the existing costing system. (3) 5. Calculate the cost of model T42 using ABC and briefly comment on the difference in the cost between the existing costing system and ABC. (9) *ROUND OFF ALL ANSWERS TO THE NEAREST RAND