Badger Ltd (Badger) manufactures plastic building materials. After a recent analysis Badger has decided to classify its products into two varieties: Largeflo and Smallflo. There are several products in each of these two categories. Largeflo are produced on large machines by a simple process. Smallflo are manufactured on small machines by a more complex process with more production stages. The previous pricing policy has been to absorb all overheads using direct labour hours to obtain total cost. Price is then calculated as total cost plus a 35 per cent mark-up.The recent analysis has also examined overhead costs; the results are shown below. Set-up costs are incurred during the production stage for each batch. The ordering costs for bought-in parts are incurred initially for each production type.

There are 4,000 direct labour hours available each month.Details for a typical Largeflo product (one of several Largeflo products) and a typical Smallflo product (again, one of several Smallflo products) are shown below.

Direct labour is paid ?16 per hour.

Required:(a) Calculate the price for each of the Largeflo and Smallflo products detailed above, using traditional absorption costing based on direct labour hours.(b) Calculate the price for the Largeflo and Smallflo products using activity-based costing. Assume that ?Other overheads? are allocated using direct labour hours.(c) O utline the points that you would raise with the management of Badger in the light of your answers to (a) and (b).(d) O utline the practical problems that may be encountered in implementing activity-based techniques and comment on how they may be overcome.

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Analysis of overhead costs Monthly volume Cost per month Large machine cost 96,000 44,800 32,500 480 hours 1,280 hours 260 set-ups Small machine cost Set-up cost Ordering bought-in parts Handling charges Other overheads 120 different parts 10,800 45,600 50,300 280,000 380 movements (see below) Largeflo Smallflo 1,000 units 1,000 units 500 units 50 units Monthly production Batch size Machine time per batch - large - small Number of bought-in parts 100 hours 1 per batch 1 movement per batch 25 hours 3 per product type 2 per batch 5 movements per batch Set-ups Handling charges Materials per unit Direct labour per unit £16 £15 2 hour 2 hour