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	$	92,000
Supervisory expense	$	4,000

Distribution of Resource Consumption Across Activity Cost Pools:

	Activity Cost Pools
	Machining	Order Filling		Other
Equipment depreciation	0.60	0.20		0.20
Supervisory expense	0.30	0.20		0.50

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	4,200	800
Product M0	15,800	200
Total	20,000	1,000

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)	$	236,500	$	262,000
Direct materials (total)	$	90,900	$	123,900
Direct labor (total)	$	110,400	$	76,100

What is the product margin for Product W1 under activity-based costing?

Answer 1

Allocation of Overhead based on activity cost pools:

Stage 1 allocation:

	Total overhead	Machining	Order pooling	Others
Activity rate		0.60	0.20	0.20
Equipment Depreciation allocation	$92,000	$55,200 [$92,000 x 0.60]	$18,400 [$92,000 x 0.20]	$18,400 [$92,000 0,20]
Activity rate		0,30	0,20	0,50
Supervisory expense allocation	$4,000	$1,200 [$4000 x 0.30]	$800 [$4000 x 0,20]	$2,000 [$4000 x 0.50]
Total	$96,000	$56,400	$19,200	$20,400

Stage 2 allocation:

	Total	Product W1	Product M0
Activity	20,000 machine hours	4200 machine hours	15,800 machine hours
Maching overhead	$56,400	$11,844 [$56,400 x (4,200 ÷ 20,000)]	$44,556 [$56,400 x (15,800 ÷ 20,000)]
Activity	1000 orders	800 orders	200 orders
Order filling Overhead	$19,200	$15,360 [$19,200 x (800 ÷ 1000)]	$3,840 [$19,200 x (200 ÷ 1000)]
Total	$75,600	$27,204	$48,396

Calculation of Product margin

	Product W1	Product M0
a. Sales	$236,500	$262,000
b. Direct materials	$90,900	$123,900
c. Direct labor	$110,400	$76,100
d. Overhead -(Calculated above)	$27,204	$48,396
Product margin [a - b - c -d]	$7,996	$13,604

Therefore product margin for product W1 = $7,996