Question $4$: Traditional Costing Versus Activity Based Costing $(28$ marks$)$

Deadly Drop Down Ltd$.($DDD$)$ assembles and sells two types of climbing harness $-$ the Trad and the Sport. The company has two production divisions: assembly and finishing.

You have obtained the following information from the last month about the two products:

$\backslash$table$[[,$Trad,Sport$],[$Production and sales $($units$),4,120,7,450],[$Costs $($per unit$)$:$],[$Materials DM$,$$$39,$$$31],[$Labour $($$$10$ per hour$)$ DL $$8,$$$6,$$$9],[$Machine hours $($per unit$),(0\mathrm{.}8),0\mathrm{.}4],[$Total number of production runs,$40,25],[$Total number of machine maintenance checks,$10,8],[$Total number of quality control checks,$80,50],[$Total purchase orders processed,$72,64],[$Total number of deliveries to finishing division,$21,35],[$Overhead costs to manufacture all Trads and Sports:,$$,],[$Machine set$-$up costs,$89,500$$$7\mathrm{.}74,],[$Machine maintenance costs,$136,125$ $$11\mathrm{.}77,],[$Quality Inspection costs $83\mathrm{.}0,76,486$ $ $$.$ A ${?}_1,],[$Ordering costs,$13,651$ $$1\mathrm{.}18,],[$Delivery costs,$101,2108\mathrm{.}75,]]$

Further information:

The company transfers products from assembly to finishing at full cost plus $20\%.$ A traditional total absorption costing approach is currently used based on labour hours.

The retail division sells the products directly to the public at the following prices: $Tra{d}_{?}$ harnesses for $$120$; Sport harnesses for $$100.$

The senior manager of the retail division thinks that the current costing system leads to an over$-$inflation of the prices her division is being charged. She believes that a costing system based on either a$)$ machine hours or b$)$ activities, would be fairer.Required

a$)$ Calculate the cost for each of the products $-$ Trad and Sport harnesses $-$ using traditional total absorption costing based on labour hours and calculate the transfer price.

b$)$ Calculate the cost for each of the products $-$ Trad and Sport harnesses $-$ using traditional total absorption costing based on machine hours and recalculate the transfer price.

c$)$ Using activity$-$based costing to allocate the overheads, recalculate the cost of Trad and Sport harnesses and recalculate the transfer price.

d$)$ Calculate the monthly profit for the retail division under each of the three approaches above.

e$)$ Provide TWO reasons why the calculations in a$)$ through d$)$ might be useful to the retail manager.