Question

Doede Corporation uses activity-based costing to compute product margins. In the first stage, the activity-based costing system allocates two overhead accounts--equipment depreciation and supervisory expense--to three activity cost pools--Machining, Order Filling, and Other--based on resource consumption. Data to perform these allocations appear below:

Overhead costs:
Equipment depreciation	$ 95,000
Supervisory expense	$ 10,300

Distribution of Resource Consumption Across Activity Cost Pools:

	Activity Cost Pools
	Machining	Order Filling	Other
Equipment depreciation	0.60	0.30	0.10
Supervisory expense	0.60	0.20	0.20

In the second stage, Machining costs are assigned to products using machine-hours (MHs) and Order Filling costs are assigned to products using the number of orders. The costs in the Other activity cost pool are not assigned to products.

Activity:

	MHs (Machining)	Orders (Order Filling)
Product W1	6,180	197
Product M0	14,900	927
Total	21,080	1,124

Finally, sales and direct cost data are combined with Machining and Order Filling costs to determine product margins.

Sales and Direct Cost Data:

	Product W1	Product M0
Sales (total)	$ 84,300	$ 65,500
Direct materials (total)	$ 33,600	$ 18,500
Direct labor (total)	$ 24,000	$ 32,100

What is the product margin for Product W1 under activity-based costing? (Round your intermediate calculations to 2 decimal places.)

Multiple Choice

• $6,636

• $2,804

• $7,364

• $3,584

Answer 1

	Correct Option B i.e. $2,804
a)	First Stage allocation of cost to activity cost pools.
		Machining	Order filling	Other	Total
	Equipment Expense	57,000	28,500	9,500	95,000
	Supervisory Expense	6,180	2,060	2,060	10,300
	Total cost	63,180	30,560	11,560	105,300
b)	Activity Cost Pool	Activity Cost	Acitivity	Activity Rate
	Machining	63,180	21,080	3.00	per mh
	Order filling	30,560	1,124	27.19	per order
c)	Calculate Cost of Job using ABC
	Activity Cost Pool	Activity Rate	Product W1	Cost allocated to product M0	Product M0	Cost allocated to product H2
	Machining	3.00	6,180	18,540	14,900	44,700
	Order filling	27.19	197	5,356	927	25,205
	Total cost of Job			23,896		69,905
d)	Calculate Product Margin
		Product W1	Product M0
	Sales	84,300	65,500
	Less:
	Direct materials	33,600	18,500
	Direct labor	24,000	32,100
	Overhead	23,896	69,905
	Product Margin	2,804	(55,005)