The Gadget Co produces three products, A, B and C, all made from the same material. Until

now, it has used traditional absorption costing to allocate overheads to its products. The company is now considering an activity based costing system in the hope that it will improve profitability. Information for the three products for the last year is as follows:

The price for raw materials remained constant throughout the year at $1·20 per kg. Similarly, the direct labour cost for the whole workforce was $14·80 per hour. The annual overhead costs were as follows:

Required:

(a) Calculate the full cost per unit for products A, B and C under traditional absorption costing, using direct labour hours as the basis for apportionment. (5 marks)

(b) Calculate the full cost per unit of each product using activity based costing. (9 marks)

(c) Using your calculation from (a) and (b) above, explain how activity based costing may help The Gadget Co improve the profitability of each product. (6 marks)