Chukwumah Nigeria Limited manufactures and sells three products X, Y and Z. The company is recently considering the introduction of an activity-based costing approach to facilitate efficient cost allocation, as well as achieve improvement in cost accuracy and reduction.

The new approach will use two direct costs categories (direct materials and direct labour) as well as five indirect cost pools which represent the five activity areas. The prior product costing system uses the two direct cost categories and a single indirect cost pool where overheads are allocated using direct labour hours.

The following information is provided for the next period:

Direct labour is paid at N8 per hour. Variable overhead is paid at N34 per unit for Product X, N44 per unit for Product Y and N38 per unit for Product Z.

Fixed Overhead Costs in the period are expected to be as follows:

N15,300,000

Required:

a. Calculate the unit costs of each product using:

(i) Prior product costing approach (Traditional Cost) based on direct labour hourly rate.

(ii) The ABC method. (10 Marks)

b. The company considered the pricing of the three products where sales prices have remained uncertain as shown in the table below:

Compute the expected unit sales prices for the three products and the total profit or loss for each product that will arise from the implementation of the ABC costing approach and the traditional costing method.     (7 Marks)

c. State reasons why activity based costing approach may be preferred to traditional absorption costing approach in modern manufacturing environment.    (3 Marks)