Question 3

1. Discuss the appropriate operating environment that is suitable for ABC system.

2. Betty Company Ltd manufactures two products, XO and X1. Estimates for the companys products for next year are provided below:

	XO	X1
Estimated production volume	4 000	3 000
Direct material cost	$70 / unit	$95 / unit
Direct labour per unit	2 hours @ $25 / hour	3 hours @ $25 / hour

Bettys estimated overhead of $1 600 000 can be identified with three major activities: order processing ($260 000), machine processing ($1 040 000) and product inspection ($300 000). These activities are driven by number of orders processed, machine hours, and inspection hours respectively.

Estimated activity levels for the next year are as follows:

	XO	X1	Total
Orders processed	400	600	1000
Machine hours	38 000	42 000	80 000
Inspection hours	8 000	16 000	24 000

Required:

Assuming that Betty Company Ltd uses activity-based costing to apply overhead to production, calculate the unit manufacturing costs of the XO and X1 products if the estimated manufacturing volume is attained.