Zeta Ltd has a production department that has four major activities: Goods In, Material handling, Production line and Quality Control.

Each of these activities has an identifiable cost driver which is given below as well the estimated volumes for the coming budgetary period.

Number of deliveries	670
Number of movements of material	315
Number of production runs	720
Number of quality tests	470

Two other activities in the department are Administration and Supervision. These two activities, while necessary, are non-volume related and should be regarded as fixed costs.

Budgeted costs for the coming period are given below:

Zeta Budgeted Costs
Cost	TOTAL	Charged to:
Management salary	78,000	Administration 20k, Supervision 58k
Basic wages	21,000	Goods in 4k, Material handling 5k, Production line 4k, Quality Control 5k, Admin 3k
Overtime	11,000	Goods in 4k, Production line 5k, Quality Control 2k
Factory overheads	12,000	Goods in 3k, Production line 3k, Quality Control 1k, Administration 2.5k, Supervision 2.5k
Other costs	2,000	Goods in 0.5k, Admin 1k, Supervision 0.5k
	124,000

Zeta Ltd have only recently started using Activity Based Budget (ABB) to set the budget for the production department, and several the staff are still unconvinced over the value of ABB over the approach they used to employ. Until recently, the production department set a traditional annual budget that used figures from the previous year as a starting point. Zeta Ltd is increasingly conscious that they need to run a more flexible organisation in response to a more volatile business environment.

• a.Using a table similar to Table 5.1 in Unit 2 Session 5, produce an activity-based budget for the coming period that shows, the total cost for each activity, the total cost for the production department and cost per activity unit.(10 marks)

Deliveries	Movements	Production runs	Quality tests
Activity Volume	670	315	720	470
Cost per activity unit	=11.5k/670 = 17	=5k/315 = 16	=12k/720 = 17	=8k/470 = 17

• b. Produce a note to the production department staff of Zeta Ltd to convince them that ABB, while superior to their previous approach, may not be the most appropriate way forward for the company. You need to specifically refer to the cost per activity unit you calculated in a) above to reinforce your argument.(10 marks)