Reference no: EM132938680

Question - Viola & Drum Ltd produces affordable musical instruments for schools. Aneena Frost, the chief accountant, is reviewing the company's current approach to allocate overheads to products. Currently the company absorbs overheads based on direct labour hours. Aneena feels that the company should switch to activity-based costing (ABC), as the product lines make different demands on the company's overhead resources - in particular, their violin model "Stradicrazy" requires a lot of advance preparation. The following information about their two main product models is available to assist in your calculations:

StradiCrazy (SC) DrumOn (DO)

Materials £36, £18

Kilos per unit (for wood) 3kgs, 1.5kgs

Labour hours per unit 1, 2

Sales price £63, £58

Sales demand 3,200, 3,600

Overhead costs:

Employee-related £74,500 Driven by labour hours

Quality testing £17,145 Driven by number of units

Material movements £60,000 Driven by number of kilos

Direct labour is charged as £9 per labour hour.

Required -

a) Calculate the total profit or loss for StradiCrazy and DrumOn using traditional costing.

b) Calculate the total profit or loss StradiCrazy and DrumOn using ABC costing. Clearly show your workings.

c) Explain the results. Consider in addition whether the introduction of ABC would make sense for the company, and why?