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TCB Ltd manufactures three lines of TV monitors: M101, M102 and M103. TCB currently uses a traditional, volume-based costing system, where overhead cost allocation is based on the number of monitors produced. The CFO is contemplating changing to an Activity Based Costing (ABC) system, as has asked for your assistance in considering this. The following information has been provided for the month of June 20X4: Traditional costing information, from the existing costing system, is presented below:

M101 M102 M103 Total

Number of monitors produced 800 600 600 2,000

$ $ $ $

Prime costs 710,000.00 660,000.00 780,000.00 2,150,000.00

Manufacturing overhead 75,600.00 56,700.00 56,700.00 189,000.00

Total manufacturing cost 785,600.00 716,700.00 836,700.00 2,339,000.00

Cost per unit 982.00 1,194.50 1,394.50

You have assisted the CFO in preparing the following activity cost pool information and cost activity driver information:

Activity Activity Drivers Total Activity Costs Assembling monitors Monitors $150,000 Setup Production runs $39,000 Distribution Deliveries $14,500

Activity Driver Driver usage for each product Total M101 M102 M103 # Monitors 800 600 600 2,000 # Production runs 16 12 12 40 # Deliveries 4 3 3 10

(a) Outline the conditions that are most beneficial to implement an ABC system. (5 marks) (b) Calculate the total overhead cost that would be allocated to each of the three products using the ABC system and the traditional costing system. (6 Marks) (c) Based on your calculations in part (b) above and the case information, would you recommend adopting the ABC system? Justify your recommendation. (3 marks) (d) The ABC calculation conducted here is an example of the second stage of cost allocation. What is the first stage of cost allocation under the ABC system, and why is this stage required? (2 marks)

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