Question 1 (20 marks) Super Electronic Company (Super) manufactures and sells three models of computer chip to a customer. Sales revenue and direct costs for the third quarter of 2018 are shown as follows: Model SE-1 SE-2 SE-3 Units produced and sold 8,000 12,000 20,000 Unit selling price $60 $50 $35 Sales revenue $480,000 $600,000 $700,000 Direct materials $140,000 $320,000 $364,000 Direct labour $120,000 $190,000 $168,000 Machine hours consumed 300 hours 90 hours 60 hours The company adopts a simple costing system by allocating the manufacturing overhead based on the machine hours which are used to manufacture the three models. Manufacturing overhead incurred in the month includes the following: Activity $ Engineering 125,000 Quality control 30,000 Machinery 128,000 Materials handling 77,000 360,000

Recently the company has learned that an activity-based costing system can provide more accurate cost information by analysing how the products use the activities during the operating processes. The following data were collected from operations during the quarter: Activity Cost Driver SE-1 SE-2 SE-3 Engineering No. of engineering hours 60 100 240 Quality control No. of inspection hours 36 120 204 Machinery No. of machine hours 300 90 60 Materials handling No. of orders 5 5 20

Required: a Use the current simple costing system to prepare a product line and total company income statement with profitability %. Show all your workings. (6 marks) b Use the activity-based costing system to prepare the product line and total company income statement with profitability %. Show all your workings. (8 marks) c Compare and explain differences in product costs under both product costing systems. Briefly discuss whether the ABC system would bring any benefit to Super. (4 marks) d What are the implications for Supers pricing strategy? (2 marks)