Precision Manufacturing Inc. (PMI) makes two types of industrial component partsthe EX300 and the TX500. An absorption
Question:
Precision Manufacturing Inc.
Income Statement
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,700,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . 1,200,000
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
Selling and administrative expenses . . . . . . . . . 550,000
Net operating loss . . . . . . . . . . . . . . . . . . . . . . . $ (50,000)
PMI produced and sold 60,000 units of EX300 at a price of $20 per unit and 12,500 units of TX500 at a price of $40 per unit. The companys traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the companys two product lines is shown below:
The company has created an activity-based costing system to evaluate the profitability of its products. PMIs ABC implementation team concluded that $50,000 and $100,000 of the companys advertising expenses could be directly traced to EX300 and TX500, respectively. The remainder of the selling and administrative expenses was organization-sustaining in nature. The ABC team also distributed the companys manufacturing overhead to four activities as shown below:
Required:
1. Using Exhibit 712 as a guide, compute the product margins for the EX300 and TX500 under the companys traditional costing system.
2. Using Exhibit 710 as a guide, compute the product margins for EX300 and TX500 under the activity-based costing system.
3. Using Exhibit 713 as a guide, prepare a quantitative comparison of the traditional and activity-based cost assignments. Explain why the traditional and activity-based cost assignmentsdiffer.
Step by Step Answer:
Managerial Accounting
ISBN: 978-0078111006
14th edition
Authors: Ray Garrison, Eric Noreen and Peter Brewer