Reference no: EM13173954

Noosa Bicycle Ltd manufactures two types of bikes-amateur and professional. The company has been using direct labour hours as the basis for applying overhead since it started its operations.  You are the newly appointed management accountant.  You have observed the company's operations and interviewed the staff. In doing so, you have collected the following information:

 

	Qty	Direct	DLH	Direct
Product Produced	Materials	Used		Labour cost
Amateur	200	$90	400	$4,000
Professional	100	120	300	3,000

 

	No. of times	No. of	No. of Design	No. of
Product	Handled	Parts	Changes	Setups
Amateur	20	10	6	5
Professional	30	15	9	7

 

The overhead costs were:

Handling	$5,000
No. of parts	$6,500
Design changes	$1,800
Setups	$1,500

 

Required:

a. Calculate the unit cost for each product using direct labour hours as the basis for applying overhead.

b. Calculate the unit cost for each product using activity-based costing (ABC).

c. Explain why the unit costs vary under(a )and (b).  Which system do you recommend and why.

d. You also need to address the main costs and limitations of implementing ABC systems.

Noosa has subsidiaries that are engaged in service industries.  Would you recommend implementing ABC in those subsidiaries?