The management of Vegetarian Meals Ltd, who make three main product lines of ready-made vegetarian meals in batches for the restaurant trade, are reviewing the cost accounting policy in relation to overheads. Currently the company absorbs overheads on the basis of direct labour hours. Some of the management board feel that the company should switch to activity-based costing (ABC), as the product lines make different demands on the company's overhead resources - in particular, Mexican Beanfeast requires a lot of advance soaking of a wide variety of raw beans and pulses, peeling and preparation and so on. You have been asked to demonstrate the difference between the existing and the proposed method of dealing with overheads. The following information is available to assist you:

Required
1. Calculate the profit or loss on each product using traditional overhead recovery (plantwide rate using direct labour hours as a base) and assuming normal absorption costing.
2. Calculate the profit or loss on each product using ABC overhead recovery and normal absorption costing.
3. Give your recommendation and explain your reasons.

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Material (€12 per kilo) Labour (€9 per hour) Machine hours per unit Units per batch Sales price Sales demand Overhead costs: Machine related Quality testing Machine set-up costs Material movements Mexican Bean Feast €36.00 €9.00 6 minutes 40 €63.00 3,200 €74,500 €17,145 €54,825 €60,000 Italian Vegetarian Pizza €18.00 €18.00 12 minutes 60 €58.00 3,600 Middle Eastern Surprise €24.00 €13.50 6 minutes 60 €60.00 4,500 driven by machine hours driven by number of units driven by number of batches driven by number of kilos