Exelon Racket (Pty) Ltd is a producer of sports equipment and manufactures two products: tennis and squash rackets. The company has been in operation over the last 20 years, and production processes have undergone a radical change from labour intensive handmade wooden rackets to carbon fibre machine manufactured rackets.

In the past, the company operated an absorption costing system. Due to the initial nature of the company, fixed manufacturing overheads were allocated using labour hours. This basis is still being used by the company. However, management is concerned that the current basis will lead to incorrect cost information resulting in poor decision making by management and the mis-pricing of rackets.

The budgeted product information for the year ended 31 May 2017 is summarised in this table:

Description	Tennis Rackets (per unit)	Squash Racket (per unit)	Total cost (R)
Selling price	900	800
Direct materials	200	100
Direct labour	150	125
Variable selling costs	20	20
Fixed manufacturing overheads			1 500 000
Fixed administration and distribution costs			2 400 000
Production in units	10 000	6 000
Sales in units	9 000	6 000

There was no opening inventory of tennis or squash rackets at the beginning of the period. Also, there is no opening or closing work-in-progress or raw materials for both products. The fixed administration and distribution costs are allocated to tennis rackets and squash rackets based on units sold.

A consultant, employed by the company to investigate alternatives to their current absorption costing system has made the following two recommendations:

To operate a variable costing system in order to provide the relevant information required for management decision-making purposes.

To operate an activity-based costing (ABC) and absorption costing system to meet the external financial accounting reporting requirements and for internal decision making purposes.

During his investigation, the consultant identified the major activities, cost drivers and the costs associated with each of these activities within the fixed manufacturing overhead costs. His findings are summarised in the table below:

Major activities	Cost driver	Cost (R)
Purchasing	Number of purchase orders	200 000
Machine set up costs	Number of set ups	250 000
Inspection	Inspection hours	800 000
Heating	Units of power	250 000

The consultant also recorded his findings regarding the utilisation of the cost drivers by each of the two products. His findings are noted in the table below.

Tennis Rackets (In total)	Squash Rackets (In total)
15 000 units of power	10 000 units of power
3 000 purchase orders	2 000 purchase orders
5 000 inspection hours	3 000 inspection hours
3 500 set-ups	1 500 set-ups
120 000 labour hours	30 000 labour hours

REQUIRED

(a)	Prepare the budgeted income statement of Exelon Racket (Pty) Ltd for the year ended 31 May 2017 for tennis rackets only under the current absorption costing system and traditional costing system.
(b)	Prepare the budgeted income statement of Exelon Racket (Pty) Ltd for the year ended 31 May 2017 for tennis rackets only assuming the variable costing system is adopted as per the first part of the consultants recommendation.
(c)	Comment on the difference in profit (if any) between the budgeted income statement prepared in part (a) and that prepared in part (b).
(d)	Calculate the gross profit of Exelon Racket (Pty) Ltd for the year ended 31 May 2017 for tennis rackets only if an activity-based costing system is adopted.
(e)	Using your calculations and findings above, discuss whether the traditional costing system or the activity-based costing system is more appropriate and why.