Diamond Electronics is producing an electronic device that is being used by companies to keep track attendance of their employees. There is stiff competition in the market and minor change in sales price has greater impact on sales of the product. Diamond Electronics has been operating in this line of business for several years. With the passage of time many competitors have entered into the market. Different competitors had employed latest technologies in order to improve the quality of the product as well as to reduce their cost. In contrast to their competitors Diamond Electronic still relaying on their skilled labour and has not adopted any latest technologies. They also have developed long term relationship with their suppliers and for many years they are buying the material from same suppliers. On the other hand competitors of the company are very much aware of changes that occur in the market. Therefore they had found suppliers outside the country as well who provide cheap and qualit

duct. Management of Diamond Electronics are reluctant to have any change in their management and production style.

Diamond Electronics uses traditional absorption costing system where overheads are absorbed on the basis of direct labour hours. Company has hired a new accountant in order to implement advance costing techniques in their business. The new accountant is of the view that company should implement Activity Based Costing system. Both products uses same material. Cost of material per meter is Rs. 20 and direct labour is paid at Rs.30 per hour. Production data relating to two products are as follows

Electronic Device

Sales volume 77000

Selling price (Rs.) 133

Direct material (meter) per

unit 3.8000000000000012

Direct labour hour per unit 2.5000000000000009

Machine hours per unit 1.1500000000000006

Number of Production

Setup 74

Number of purchase orders 67

Information relating to fixed overheads are as under

Overheads Cost Amount (Rs.) Relevant Activity

Machine running cost 8700 Machine hours

Supporting direct labour 79000 Direct labour hours

Production setup cost 43000 Number of production setups

Procurement cost 55000 Number of purchase orders

Requirements

Calculate cost per unit using Absorption Costing and Activity Based Costing. (5+5)

Suggest which method company should use and why? (04)

Calculate target cost and cost gap. Assume that market price of the product is Rs. 153.00000000000006 and required margin is 20% on selling price. To calculate cost gap use cost per unit of the method you have suggested in Part (2). (02)

Suggest four steps that company may take to reduce its cost gap. (04)