QUESTION ONE $[25]$

MS manufactures three types of skincare product for sale to retailers. MS currently operates

a standard absorption costing system. Budgeted information for next year is given below:

Products Anti$-$ageing cream Facial Masks Collagen Fillers Total

R$000$ R$000$ R$000$ R$000$

Sales $600003800022000120000$

Direct material $118006200400022000$

Direct labour $3700240019008000$

Fixed

production

overheads

$15400$

Gross profit $74600$

Anti$-$ageing cream Facial Masks Collagen Fillers

Production and sales $($units$)10000001200000600000$

Fixed production overheads are absorbed using a direct material cost percentage rate.

The management accountant of MS is proposing changing to an activity based costing

system. The main activities and their associated cost drivers and overhead cost have been

identified as follows:

Activity Cost Driver Production overhead cost

R$000$

Machine set up Number of set ups $3600$

Quality inspection Number of quality inspections $1200$

Processing Processing time $6500$

Purchasing Number of purchase orders $1800$

Packaging Number of units of product $2300$

$15400$

$2$

Further details have been ascertained as follows:

Anti$-$ageing cream Facial Masks Collagen Fillers

Batch size $($units$)100020001500$

Machine set$-$ups per batch $334$

Purchase orders per batch $221$

Processing time per unit

$($minutes$)$

$234$

Quality inspections per batch $111$

Required:

$1\mathrm{.}1$ Calculate for each product:

$1\mathrm{.}1\mathrm{.}1$ the total fixed production overhead costs using the current absorption costing

system $(4)$

$1\mathrm{.}1\mathrm{.}2$ the total gross profit using the proposed activity based costing system. $(16)$

$1\mathrm{.}2$ List five $(5)$ advantages of absorption costing systems. $(5)$