ACCT331 - October 2021 Question Three (15 Marks): MID-TERM EXAMINATION- FORM A 6/9 Zamalek Company manufactures two products, Standard and Enhanced, and applies overhead on the basis of direct labor hours. Anticipated manufacturing overhead and direct labor time for the upcoming accounting period are $800,000 and 25,000 hours, respectively, Information about the company's two products is as follows: Standard: Estimated product volume 3,000 units Direct material cost $25 per unit Direct labor cost $36 per unit Direct labor time 9,000 hours Enhanced: Estimated product volume 4,000 units Direct material cost $40 per unit Direct labor cost $48 per unit Direct labor time 16,000 hours The company's three activities result in an overhead cost of $800,000 consisting of order processing ($150,000), machine processing ($560,000) and product inspection ($90,000). The cost driver of each activity (respectively) involves the number of orders processed, machine hours worked and inspection hours. The following table shows Standard and Enhanced data relevant to the three activities: Order processed Machine hours worked Inspection hours Standard 300 18,000 2,000 Enhanced 200 22,000 8,000 Total 500 40,000 10,000 Top management is very concerned about declining profitability despite a healthy increase in sales volume. The decrease in profit is not clear because the company recently undertook a massive plant renovation and, in the meantime, a new and highly automated machinery was installed which was expected to produce significant operating efficiencies. Required: 1. Activity-based costing (ABC) is said to result in improved costing accuracy when compared with traditional costing procedures. Briefly explain how this improved accuracy (2 Marks is attained. 2. Under the scenario of: a. Using the direct labor hours (the simple costing system) to apply overhead production, calculate the unit manufacturing costs of the Standard and Enhance (2 Mar products. b. Using the activity-based costing system (ABC), calculate the unit manufacturing costs of the Standard and Enhanced products. (5 Marks) 6ACCT331 - October 2021 MID-TERM EXAMINATION- FORM A 7/9 3. Given that Zamalek is working on a competitive environment and the selling prices are based heavily on cost. a. Using direct labor hours as an allocation base (the simple costing system), which product is overcosted and which product is undercosted? (1 Mark) b. Compute the gross profit per unit of the Standard and Enhanced products using both simple costing and ABC systems, assuming that the selling price per unit for the Standard product is $200 while the selling price per unit for the Enhanced product is $250. (2 Marks) 4. Is it possible that overcosting and undercosting and the subsequent determination of selling prices are contributing to the decline in company's profitability? Explain and briefly discuss two other implications/consequences of applying the ABC system in the company.