Question

Morton Company has two divisions. Sales, direct materials cost, direct labor cost, and manufacturing overhead data for Morton’s two divisions are available below. Note: All of Morton Company’s products are sold in competitive markets.

                                                                    Missile                                Salt

                                                                 Products                       Products

Sales                                                     $1,500,000                    $1,000,000

Direct labor                                            (800,000)                       (300,000)

Direct materials                                     (100,000)                         (40,000)

Manufacturing overhead*                    (400,000)                       (150,000)

Gross profit                                            $200,000                        $510,000

  

*Manufacturing overhead is allocated to production based on the amount of direct labor cost.

  

        Morton has determined that its total manufacturing overhead cost of $550,000 is a mixture of batch-level costs and product line costs. Morton has assembled the following information concerning the manufacturing overhead costs, the annual number of production batches, and the number of product lines in each division.

  

                                                          Total

                                          Manufacturing

                                                  Overhead                      Missile                        Salt

                                                         Costs                   Products               Products

Batch-level overhead               $250,000               10 batches            90 batches

Product line overhead               300,000                       3 lines                   7 lines

                                                   $550,000

  

        Which ONE of the following statements is MOST CORRECT?

• If the activity-based costing system had been used in the most recent year in place of the traditional overhead allocation technique, profit for the Missile Division would have increased by $25,000.

• If the activity-based costing system had been used in the most recent year in place of the traditional overhead allocation technique, profit for the Missile Division would have decreased by $25,000.

• If the activity-based costing system had been used in the most recent year in place of the traditional overhead allocation technique, profit for the Missile Division would have increased by $260,000.

• If the activity-based costing system had been used in the most recent year in place of the traditional overhead allocation technique, profit for the Missile Division would have decreased by $260,000.

• If the activity-based costing system had been used in the most recent year in place of the traditional overhead allocation technique, profit for the Salt Division would have decreased by $285,000.

• If the activity-based costing system had been used in the most recent year in place of the traditional overhead allocation technique, profit for the Salt Division would have increased by $285,000.

Answer 1

Option 5 which is If the Activity Based Costing system had been used in the most recent year in place of the traditional Overhead Allocation technique Profit for the Salt Division would have decreased by $ 285,000 is the Correct Answer

Profit of Salt Division using Traditional Costing = $ 510,000

Profit of Salt Division using Activity Based Costing = $ 225,000

Decrease in Profit = 510,000 - 225,000

Decrease in Profit = $ 285,000

Supporting Work

Particulars	Missile	Salts
Sales	15,00,000	10,00,000
Direct Labour	(8,00,000)	(3,00,000)
Direct Materials	(1,00,000)	(40,000)
Manufacturing Overhead	(1,15,000)	(4,35,000)
Gross Profit	4,85,000	225,000

	A	B	C=A/B
Particulars	Estimated Activity Costs	Estimated Cost Driver	Activity Allocation Rate
Batch Level Overhead	250,000	100	2,500	Per Batch
Product Line Overhead	300,000	10	30,000	Per Line
Total	550,000

	A	B	C =A*B	D	E =A*D
Particulars	Activity Allocation Rate	Activity for Missile	Manufacturing Overhead Missile	Activity for Salt	Manufacturing Overhead Salts
Batch Level Overhead	2,500	10	25,000	90	225,000
Product Line Overhead	30,000	3	90,000	7	210,000
Total			115,000		435,000