Question

Question 1
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.
b Use the activity-based costing system to prepare the product line
and total company income statement with profitability %. Show all
your workings.
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.
d What are the implications for Super’s pricing strategy?

Answer 1

a) Income Statement as per Current Simple Costing Syste

Particular	SE-1	SE-2	SE-3	Total
Sales	$480,000	$600,000	$700,000	$1,780,000
Less :
Direct Expenses	$140,000	$320,000	$364,000	$824,000
Direct Labour	$120,000	$190,000	$168,000	$478,000
Manufacturing Overhead (Activity)
Engineering	$83,333	$25,000	$16,667	$125,000
Quality Control	$20,000	$6,000	$4,000	$30,000
Machinery	$85,333	$25,600	$17,067	$128,000
Material Handling	$51,333	$15,400	$10,267	$77,000
Profit	($19,999)	$18,000	$119,999	$118,000
Profit %	0	3.00%	17.14%	6.63%

               

b) Activity Based Costing

Particular	SE-1	SE-2	SE-3	Total
Sales	$480,000	$600,000	$700,000	$1,780,000
Less :
Direct Expenses	$140,000	$320,000	$364,000	$824,000
Direc Labour	$120,000	$190,000	$168,000	$478,000
Manufacturing Overhead (Base on Machin Hrs)
Engineering	$18,750	$31,250	$75,000	$125,000
Quality Control	$3,000	$10,000	$17,000	$30,000
Machinery	$85,333	$25,600	$17,067	$128,000
Material Handling	$12,833	$12,833	$51,333	$77,000
Profit	$100,084	$10,317	$7,600	$118,000
Profit %	20.85%	1.72%	1.09%	6.63%

Working

400	60	100	240
125000
312.5	18750	31250	75000	125000
360	36	120	204
30000
83.33333	3000	10000	17000	30000
450	300	90	60
128000
284.4444	85333.33	25600	17066.67	128000
30	5	5	20
77000
2566.667	12833.33	12833.33	51333.33	77000

c) There will be no difference in overall profit while using simple costing method or ABC Costing method only Difference will be arises on individual product basis as ratio of distribution of Expenses are differ as per the used of Activity. Hence it is better to used ABC costing instead of Simple costing method for overhead distribution

d) Pricing Strategy will be change and is as per ABC based