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The home furnishings division purchases some goods ready for resale and manufactures

certain product lines. Wooden tables and chairs are manufactured inhouse and are costed

using a joint and by$-$product costing system. Logs are purchased from wholesalers and

typically added into the process to generate various sizes of wood that can be used in the

manufacturing of different products. At split$-$off point, one log generates $6$m$2$ of wood used in

the manufacture of tables and $4$m$2$ of wood used in chairs. From each log of wood, a quantity of

saw dust and off$-$cuts is produced. Bird farmers regularly purchase the saw dust and off $$ cuts

and are willing to pay R$50$ for the saw dust and cut offs per log$.$ No further processing is needed

for these by $$ products. Total joint costs to be allocated are R$3000$ per log$.$

$600$ logs were processed during the $2022$ financial year. Further processing costs are incurred

after which the products are then sold. The following information is available:

Selling price per m$^2$

after further processing

Table wood R$80$ R$810$

Chair wood R$60$ R$440$

Another item produced inhouse are the bedside lamps. The bedside lamps are available in $3$

different sizes and are produced using mostly the same production methods and equipment

Product Further processing

costs per m$^2$

for each size. The company uses the traditional costing method at present to cost the bedside

lamps. The following budgeted information is applicable for the $3$ sizes of bedside lamps for the

financial year ending $31$ December $2023.$

Product $$

bedside lamps

Labor time per

unit

Machine time

per unit

Material cost

per unit $($R$)$

Volume $($units$)$

Large $60$ minutes $180$ minutes $5001500$

Medium $60$ minutes $60$ minutes $2402250$

Small $30$ minutes $90$ minutes $40012300$

The direct labor cost is R$40$ per hour. Manufacturing overhead costs are allocated to the

products at present on the basis of machine hours. The allocation rate presently used is R$30$

per machine hour. The division$$s cost accountant, Josie Potter, has recently attended a short

course on costing methods and is considering implementing an activity$$based costing system

$($ABC$).$ At a recent management meeting, on the topic of moving from the traditional costing

system to the activity$-$based costing system, Josie stated: $$We$$ve got to make better pricing

decisions and we can only do that using a more accurate method like ABC to allocate

overhead costs$.$ After some investigation, she has collected the following information:

$$ Manufacturing overheads are driven by five activities, namely: Set up costs $(25\%),$ machinery

costs $(20\%),$ material handling costs $(15\%),$ inspection costs $(30\%)$ and maintenance costs

$(10\%).$

$$ The following budgeted activity volumes are associated with the product line for the financial

year ending $31$ December $2023$:a$)$ Calculate the budgeted total cost per unit for the small

bedside lamps only, using both the traditional costing

system and the activity$-$based costing $($ABC$)$ system.

b$)$ Comment on whether you agree with Josie Potter's

statement at the management meeting. Refer to

your answers above.

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