REQUIRED:a. Compute the product cost per unit for each product line, using labour hours as the basis ofoverheads absorption.[5 Marks]b. Compute the product cost per unit for each product line if the activity-based costing systemis introduced.[11 Marks]c. Discuss two (2) reasons that may contribute to differences in profits calculating in (a) and(b).[4 Marks]

QUESTION 1 (20 MARKS) The Sophie Jewellers is a leading manufacturer of crystals and has extensive jewellery lines for women which include necklaces, bracelets, rings, earrings and watches. Due to the demands in the current fashion trend, the company introduced a new product line: Men's Watch which has a wide array of charms. However, in spite of increasing sales of its new product line, the company's profits have been steadily decline. The management of Sophie Jewellers is unhappy with the company's financial performance and has asked the cost accountant to do an analysis. The cost accountant has identified that currently the company is using direct labour hours to absorb manufacturing overheads. He believes that activity-based costing can provide a better allocation of production overheads to products than the current system does. The following was total production overheads for the last period recorded by the cost accounting system: Cost category Costs (RM) Purchasing 550,000.00 Rework 275,000.00 Product Testing 475,000.00 Machine-related costs 500,000.00 The company expects to produce 10,000 Women's Watch and 7,500 Men's Watch in 2021. Each Women's Watch requires 1.5 direct labour hours to produce and each Men' Watch requires 2 hours to produce. The selling price, direct material and direct labour costs for the two products are as follows: Women Watch Men Watch Cost (RM) (RM) Selling price per unit 2,200.00 2,500.00 Direct material (per unit) 550.00 650.00 Direct labour (per unit) 150.00 200.00 The cost accountant has also gathered the following overhead costs and activities for the two products: Expected Activity Activity Measures Women Watch Men Watch Number of purchase orders 1,000 1,000 Number of rework orders 500 500 Number of tests 500 500 Machine hours 5,000 15,000