Speed HD $($Pty$)$ Ltd $($Speed$)$ produces three models of cars for sale in the automotive

retail market. Speed currently operates a standard absorption costing system.

Budgeted information for the financial year ended $31$ December $2024$ is as follows:

Models

Momo Cannal Bulo Total

Rands Rands Rands Rands

Sales $6400000096400000104000000264400000$

Direct material $(18600000)(28400000)(41200000)(88200000)$

Direct labour $(11800000)(14800000)(17600000)(44200000)$

Contribution $336000005320000045200000132000000$

Production overhead $(79600000)$

Gross profit $52400000$

Models

Momo Cannal Bulo

Production$/$Sales $($units$)200022001800$

Machine hours per car $200300400$

The current production overhead cost is absorbed using a machine$-$hour rate.

Speed is considering changing to an activity$-$based costing system. The main activities

and their associated cost drivers and overhead costs have been identified as follows:

Activity Cost driver Production overhead cost

Machining Machine hours R$14000000$

Set$-$up Number of Set ups R$23000000$

Quality inspection Number of quality inspections R$24500000$

Stores receiving Number of component deliveries R$18100000$

R$79600000$

The analysis revealed the following information:

momo Cannal Bulo

Cars per production run $($Note $1)542$

Quality inspections per production run $203040$

Number of component deliveries $400600800$

Note $1$:

$$ The machines are set up for each production run of each model.

$$ Each car is considered a unit.

Explain why an activity$-$based costing system may produce more accurate

product costs than a traditional absorption costing system.

$(4$ marks$)$