The Sports Manufacturers Ltd. produces two products: (i) a recreational whitewater play boat and (ii) a high performance competition boat. The recreation boat is uniform in style and dimensions.

The competition boat is customer designed to fit the individual requirement. The data related to the two products for the most recent year are summarised below:

REQUIRED:

(a) The traditional costing system that Sports Manufacturers is using, assigns the total overheads on the basis of direct labour cost. Discuss why this is not an accurate way to assign overheads to the two products.

(b) Assume that a consultant to create an ABC system for Sports Manufactures develops the following data:

Determine the overhead allocation to each line of boats using an ABC approach and compute the total unit cost for each model.

(c) Discuss why activity-based allocations are different from those generated by the traditional method.

Transcribed Image Text:

1 Sales and production (number) 2 Sales price (per boat) 3 Unit costs: Direct material Direct labour Overheads Gross profit (2-3) Overheads (total): Depreciation of building Depreciation of equipment Materials ordering Quality control Maintenance and security Setup and drafting Supervision Recreation boat Competition boat 900 3,000 100 3,300 750 1,000 500 500 675 1,925 675 2,175 1,075 1,125 1,25,000 1,25,000 75,000 50,000 50,000 1,00,000 1,50,000 6,75,000