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?

$7,996 A

$23,356 B

-$12,800 C

$35,200 D

Answer 1

Solution :

First stage allocation of cost to activity cost pools
Particulars	Total Cost	Machining		Order Filling		Others
		%	Amount	%	Amount	%	Amount
Equipment depreciation	$92,000.00	60%	$55,200.00	20%	$18,400.00	20%	$18,400.00
Supervisory expense	$4,000.00	30%	$1,200.00	20%	$800.00	50%	$2,000.00
Total	$96,000.00		$56,400.00		$19,200.00		$20,400.00

Determination of activity rate for each activity and allocation of overhead to product
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Product W1
					Qty	Allocated overhead
Machining	$56,400.00	Machine hours	20000	$2.82	4200	$11,844.00
Order filling	$19,200.00	Nos of orders	1000	$19.20	800	$15,360.00
Total	$75,600.00					$27,204.00

Computation of Product Margin - W1
Particulars	Amount
Sales	$236,500.00
Costs:
Direct material	$90,900.00
Direct labor	$110,400.00
Allocated overhead	$27,204.00
Product margin	$7,996.00

Hence option A is correct.