CASE

Traditional Costing and Activity Based Costing $($ABC$)$

Al$-$Safah Company Ltd manufactures two types of Milk $$ Classic and Flavoured. Each product requires the incorporation of a difficult$-$to$-$handle special part $($one of them for a

Classic and four for a Flavoured$).$ Both of these products are made in batches $($large batches for Classic and small ones for Flaoured$).$ Each new batch requires that the

production facilities are $$set up$.$ Details of the two products are:

Classic Flavoured

Annual production and sales $$ units $24,00024,000$

Sales price per unit OMR $130$ OMR $174$

Batch size $$ units $2,000100$

Direct labour time per unit $$ hours $45$

Direct labour rate per hour OMR $10$ OMR $16$

Direct material cost per unit OMR $44$ OMR $64$

Number of special parts per unit $28$

Number of set$-$ups per batch $26$

Number of separate material issues from stores per batch $22$

Number of sales invoices issued per year $100480$

In recent months, Al$-$Safah Company Ltd has been trying to persuade customers who buy the Classic to purchase the Flovoured instead. An analysis of overhead costs for AlSafah Company Ltd has provided the following information:Page $5$ of $5$

Management Accounting $-1/$Assignment BSAC$2208/$BAAC$2204$ Semester$-$Spring$-2023-24$

Overhead cost analysis OMR Cost driver

Set$-$up cost $146,400$ Number of set$-$ups

Special part handling cost $120,000$ Number of special parts

Customer invoicing cost $58,000$ Number of invoices

Material handling cost $126,000$ Number of batches

Other overheads $216,000$ Labour hours

Required:

$($a$)$ Calculate the profit per unit and the return on sales for Classic and Flovoured using

$($i$)$ the traditional direct$-$labour$-$hour based absorption of overheads;

$($ii$)$ activity$-$based costing methods.

$($b$)$ Comment on the managerial implications for Al$-$Safah Company Ltd of the results in $($a$)$ above.