Orca Ltd. operates a single factory where it manufactures three models of an industrial product (Models A, B, and C). Details of the three products...
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Orca Ltd. operates a single factory where it manufactures three models

of an industrial product (Models A, B, and C). Details of the three products are as follows: Direct labour hours (DLH) per unit Machine hours (MH) per unit Raw materials cost per unit Units produced, per month Model A 0.25 0.75 €25 1,000 Model B 0.75 0.5 €20 2,000 Model C 0.5 1.075 €35 10,000 All direct labour in the factory is paid at a rate of €20 per DLH. The following are the overhead costs in the factory each month: Set-up of production equipment at the start of production runs €750,000 Electricity cost for operating production machinery €500,000 Dispatch costs, arising from shipping of customer orders €250,000 Quality control inspection costs €600,000 Orca's existing product costing system allocates all overheads to products on a MH basis. However, the accountant is considering replacing the existing costing system with an activity-based costing (ABC) system. For this purpose, she has assembled the following data concerning the activities involved in the production and dispatch of each month's output: Activity: Number of set-ups Number of dispatches Number of quality control inspections Model A 24 100 48 Model B 36 160 56 Model C 140 740 216 Required: (a) Determine the cost per unit for each of the three products using Orca's existing product costing system. (8 marks) (b)Show what the costs per unit would be for each product, if the existing product costing system were to be replaced by an ABC system. (22 marks) (c) After comparing your results in parts (a) and (b) above, Orca Ltd.'s chief executive has asked you to explain (1) why the two systems give very different unit costs in this case and (2) why he should regard the ABC system as "more accurate" and "better" than the existing product costing system.

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