Noosa Bicycle Ltd manufactures two types of bikes-amateur and professional. The company has been using direct labour hours as the basis for applying overhead since it started its operations. You are the newly appointed management accountant. You have observed the company's operations and interviewed the staff. In doing so, you have collected the following information:
|
|
Qty
|
Direct
|
DLH
|
Direct
|
|
Product Produced
|
Materials
|
Used
|
|
Labour cost
|
|
Amateur
|
200
|
$90
|
400
|
$4,000
|
|
Professional
|
100
|
120
|
300
|
3,000
|
|
|
No. of times
|
No. of
|
No. of Design
|
No. of
|
|
Product
|
Handled
|
Parts
|
Changes
|
Setups
|
|
Amateur
|
20
|
10
|
6
|
5
|
|
Professional
|
30
|
15
|
9
|
7
|
The overhead costs were:
|
Handling
|
$5,000
|
|
No. of parts
|
$6,500
|
|
Design changes
|
$1,800
|
|
Setups
|
$1,500
|
Required:
a. Calculate the unit cost for each product using direct labour hours as the basis for applying overhead.
b. Calculate the unit cost for each product using activity-based costing (ABC).
c. Explain why the unit costs vary under(a )and (b). Which system do you recommend and why.
d. You also need to address the main costs and limitations of implementing ABC systems.
Noosa has subsidiaries that are engaged in service industries. Would you recommend implementing ABC in those subsidiaries?