Harley Davidson plc assembles three types of motorcycle at the same factory: the 50cc
Sunshine; the 250cc Roadster and the 1000cc Fireball. It sells the motorcycles
throughout the world. In response to market pressures, Harley plc. has invested heavily
in new manufacturing technology in recent years and, as a result, has significantly
reduced the size of its workforce.
Historically, the company has allocated all overhead costs using total direct labour
hours but is now considering introducing activity-based costing (ABC).
Harley plc's accountant has produced the following analysis.

Annual Output
(Units)

Annual Direct
Labour Hours

Selling Price (£
per unit)

Raw Material
Cost (£ per
unit)

Sunshin
e 2000 200000 4000 400
Roadster 1600 220000 6000 600
Fireball 400 80000 8000 900

The three cost drivers that generate overheads are:

1. Deliveries to retailers - the number of deliveries of motorcycles to retail
showrooms
2. Set-ups - the number of times the assembly line process is re-set to
accommodate a production run of a different type of motorcycle
3. Purchase orders - the number or purchase orders.
The annual cost driver volumes relating to each activity and for each type of motorcycle
are as follows:

Number of
deliveries to
retailers Number of set-ups

Number of
purchase orders

Sunshin
e 100 35 400
Roadster 80 40 300
Fireball 70 25 100

The annual overhead costs relating to these activities are as follows:

£
Deliveries to retailers 2400000
Set-up costs 6000000
Purchase Orders 3600000

All direct labour is paid at £5 per hour. The company holds no stocks. At a board
meeting there was some concern over the introduction of activity-based costing.
The finance director argued: ‘I very much doubt whether selling the Fireball is viable but
I am not convinced that activity-based costing would tell us any more than the use of
labour hours in assessing the viability of each product.’
The marketing director argued: ‘I am in the process of negotiating a major new contract
with a motorcycle rental company for the Sunshine model. For such a big order, they
will not pay our normal prices, but we need to at least cover our incremental costs. I am
not convinced that activity-based costing would achieve this as it merely averages costs
for our entire production.’

The managing director argued: ‘I believe that activity-based costing would be an
improvement, but it still has its problems. For instance, if we carry out an activity many
times surely, we get better at it, and costs fall rather than remain constant. Similarly,
some costs are fixed and do not vary either with labour hours or any other cost driver'.
The chairman argued: ‘I cannot see the problem. The overall profit for the company is
the same no matter which method of allocating overheads we use. It seems to make no
difference to me.’
Required:
(a) Calculate the total profit on each of Harley Davidsons plc's three types of products
using each of the following methods to attribute overheads:
(i) the existing method based on labour hours; and
(in) activity-based costing. (25 marks)

(b) Write a report to the directors of Harley Davidsons plc, as its management
accountant. The report should:
(i) evaluate the labour hours and the activity-based costing methods in the
circumstances of Harley plc; and
(ii) examine the implications of activity-based costing for Harley plc, and in so doing
evaluate the issues raised by each of the directors.
Refer to your calculations in requirement (a) above where appropriate.