XYZ Manufacturing produces two household products namely AKAYU and ABATU. The following is its income statement for 2018 under absorption costing method.

XYZ Manufacturing produced and sold 70,000 units of AKAYU at a price of RM20 per unit and 17,500 units of ABATU at a price of RM40 per unit. Manufacturing overhead costs are allocated to products using a plant wide overhead rate and machine hours as the allocation base. Additional information relating to the companys two products lines are shown below:

The new accountant, Mr Azli Ahmad has created an activity based costing system to evaluate the profitability of its products. Under Mr Azli who in charged on ABC Team, concluded that RM 50,000 and RM 100,000 of the companys selling and administrative expenses could be directly traced to AKAYU and ABATU respectively. The team also distributed the companys manufacturing overhead to four activities as shown:

	RM
Sales	2,100,000
Cost of goods sold	1,600,000
Gross margin	500,000
Selling and administrative expenses	550,000
Net operating income	(50,000)

	AKAYU (RM)	ABA TU (RM)	Total (RM)
Direct materials	436,300	251,700	688,000
Direct labour	200,000	104,000	304,000
Manufacturing overhead			608,000

	Manufacturing overhead (RM)	AKAYU	ABA TU
Machining (machine hour)	213,500	90,000	62,500
Setups (setup hours)	157,500	75	300
Product sustaining (number of products)	120,000	1	1
Other	117,000	-	-

3

Required:

1. Compute product margins for AKAYU and ABATU under the companys traditional costing system. (6 marks)

2. Compute product margins for AKAYU and ABATU under activity based costing

system. (6 marks)

c. Why the two systems (traditional costing and ABC) gave different results even though using similar data? Explain. (6 marks)

d. In your opinion, why ABC is more applicable to large organizations as compared to smaller organizations. Discuss.