Answer all questions.

1.Describe how the direct, step-down and reciprocal cost allocation methods differ in the way they recognise reciprocal services among support departments.

2.The following comparative data is provided for the Laventura Boating Company. It is stated that the company has more accurate product cost information using activitybased costing to allocate overhead.

a.Describe the differences in profitability resulting from the two costing approaches. (4 marks)

b.Explain why the overhead cost is so different using activity-based costing. (2 marks)

c.List 2 possible decisions that management might take due to the significant change in relative profitability of the two types of boats resulting from the use of ABC. (2 marks)

d.Activity-based costing undoubtedly provides better cost information than most traditional costing methods, such as plant wide and department allocation methods. However, ABC has its limitations. What are the advantages and disadvantages of using activity-based costing?

Laventura Boating Company (Direct labour hours as allocation base) FISHING BOAT LUXURY BOAT $ S Direct materials 32 000 41 600 Direct labour 19 200 24 000 Overhead* 40 960 51 200 Total product cost per unit (a) 33 328 116 800 Sales price (b) 102 400 144 000 Profit= (b)-(a) 19 072 27 200 Activity-Based Costing (several different allocation bases) FISHING BOAT LUXURY BOAT $ $ Direct materials 32 000 1 600 Direct labour 19 200 24 000 Overhead* 32 128 95 360 Total product cost per unit (a) 83 328 160 960 Sales price (b) 102 400 144 000 Profit= (b)-(a) 19 072 16 960)