Case Study 2 Roggee Limited ('Roggee") makes three types of lemonade - Skoosh (S), Ginger (G) and Pop (P) at its production plant in southern Scotland. The lemonade is produced in 10-litre packs. Roggee has always used a traditional product costing system using machine hours to allocate production overheads to the three types of lemonade. The Board of Directors, as advised by the CFO, is now considering the introduction of an activity-based costing ('abc') system. Some of the directors, however, have concerns about the implementation problems of such a new system. Details of the three types of lemonade for a typical month are: Labour Machine Material cost () 10 litre packs hours hours per 10 litres produced Skoosh 0.10 0.30 2.00 3,100 Ginger 0.30 0.20 3.00 6,000 Pop 0.25 0.60 5.00 16,450 Direct labour costs 11 per hour and production overheads are allocated to the 10-litre packs of lemonade on a machine hour basis. The overhead allocation rate for the month is 30 per machine hour. Total production overheads are 360,000 and further analysis shows that they can be divided up as follows: Analysis: % Inventory costs 10% Set-up costs 25% Costs relating to machinery 15% Product testing costs 30% Quality control costs 20% Total production overhead 100% The activity volumes associated with each 10-litre pack of lemonade for the month are: Number of machine set ups Skoosh Ginger Number of inventory movements 30 10 45 85 Number of product tests 350 200 150 700 26 74 90 190 Number of quality inspections 75 90 200 365 Pop Required: 1. Calculate the cost per 10-litre pack for each lemonade type using traditional methods, allocating overheads on the basis of machine hours. Show all workings. (3 marks) 2. Calculate the cost per 10-litre pack for each lemonade type using 'abc' principles (to two decimal places). Show all workings. (10 marks) 3. Explain why costs per unit calculated under 'abc' are often very different to costs per unit calculated under more traditional methods, illustrating your answer with reference to the 10-litre packs produced by Roggee Limited (7 marks - maximum word count 300 words) 4. Discuss the implications for Roggee Limited of a switch to 'abc' on its pricing strategy and profitability. (6 marks - maximum word count 300 words) 5. Explain the implementation problems that Roggee might experience when 'abc' is first introduced. (4 marks - maximum word count 200 words)