Precision Manufacturing Inc. (PMI) makes two types of industrial component parts—the EX300 and the TX500. An absorption costing income statement for the most recent period is shown below:
Precision Manufacturing Inc
Cost of goods sold 1,228,954
Gross margin 400,446
Selling and administrative expenses 550,000
Net operating loss $ (149,554)
PMI produced and sold 60,100 units of EX300 at a price of $19 per unit and 12,500 units of TX500 at a price of $39 per unit. The company’s 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 company’s two product lines is shown below:
EX300 TX500 Total
Direct materials $ 400,900 $ 162,600 $ 563,500
Direct labor $ 120,200 $ 42,400 162,600
Manufacturing overhead 502,854
Cost of goods sold $ 1,228,954
The company has created an activity-based costing system to evaluate the profitability of its products. PMI’s ABC implementation team concluded that $54,000 and $107,000 of the company’s 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 company’s manufacturing overhead to four activities as shown below:
Activity Cost Pool (and Activity Measure) Overhead EX300 TX500 Total
Machining (machine-hours) $ 213,504 91,000 62,600 153,600
Setups (setup hours) 126,850 75 220 295
Product-sustaining (number of products) 101,600 1 1 2
Other (organization-sustaining costs) 60,900 NA NA NA
Total manufacturing overhead cost $502,854
1) Compute the product margins for the EX300 and TX500 under the company’s traditional costing system.
2) Compute the product margins for EX300 and TX500 under the activity-based costing system
3) Prepare a quantitative comparison of the traditional and activity-based cost assignments.
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