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QUESTION 3 (35 MARKS)

Mexico Limited, a newly established manufacturing company in the Northern Industrial area, manufactures two types of Boardroom Tables. One type of these Boardroom tables is sold locally and the other type is exported to South Africa. While the designs are identical, the material used is different to cater for the different climatic conditions of the market segments. The two products are produced with the same equipment and they utilize the same overhead resources. In 2021, the company has budgeted to manufacture 60 000 Boardroom Tables for the local market and 40 000 Boardroom Tables for export to South Africa. The manufacturing is done in batches of 1 000 Boardroom Tables each.

Other details of the companys activities, inputs and outputs are as follows:

Analysis of overhead costs

Material handling N$ 200 000

Material procurement N$ 40 000

Machine set-up N$ 180 000

Quality control N$ 270 000

Production N$ 610 000

Depreciation N$ 200 000

TOTAL N$ 1 500 000

Analysis of cost drivers

Overhead Cost driver Local Export

Material handling Material movements 100 60

Material procurement Number of orders 200 200

Machine set-ups Number of set-ups / batch 1 1

Quality control Number of inspections 150 100

Depreciation Machine hours / unit 3 5

Production Direct labour hours / unit 0.75 0.50

The company management has been using the traditional costing approach to allocate overheads between the two products, with direct labour hours as allocation base. They are thinking of applying the Activity-Based Costing System.

REQUIRED:

Calculate the overhead cost per unit, using;

3.1 The Traditional Costing Approach (7 Marks)

3.2 The Activity-Based Costing Approach (28 Marks)

TOTAL (35 Marks)

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