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	$	74,000
Supervisory expense	$	6,800

Distribution of Resource Consumption Across Activity Cost Pools:

	Activity Cost Pools
	Machining	Order Filling		Other
Equipment depreciation	0.40	0.30		0.30
Supervisory expense	0.40	0.20		0.40

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	6,110	136
Product M0	16,900	958
Total	23,010	1,094

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)	$	77,200	$	66,800
Direct materials (total)	$	34,400	$	17,200
Direct labor (total)	$	22,800	$	29,200

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

Answer 1

Solution:

Product Margin is the different between Sales and total manufacturing cost.

Manufacturing Cost includes direct material cost, direct labor cost and applied manufacturing overheads.

First of all we will assign the cost to activity cost pools

	Assigning Cost to Activity Cost Pool			Total
	Machining	Order Filing	Other
Equipment depreciation	$29,600 (74000*0.4)	$22,200 (74000*0.30)	$22,200 (74000*0.30)	$74,000
Supervisory Expense	$2,720 (6800*0.40)	$1,360 (6800*0.20)	$2,720 (6800*0.40)	$6,800
Total	$32,320	$23,560	$24,920	$80,800

Now we will calculate the cost per activity and total manufacturing overhead assigned to Product W1 based on the actual activity used by Product W1

						Product W1
Activity Cost Pool	Expected Manufacturing Overhead Costs (A)	Expected Activity Cost Driver (B)		Activity Rate (C = A/B)		Activity Driver USAGE (H)	Overhead Assigned (C*H)
Machining	$32,320	23,010	Machine Hours	$1.40	per machine hour	6110	$8,554.00
Order Filing	$23,560	1094	Number of orders	$21.54	Per order	136	$2,929.44
Other	$24,920
	$80,800						$11,483.44

Product Margin

	Product W1
Total Sales	$77,200
Total Manufacturing Costs:
Direct materials	$34,400
Direct Labor	$22,800
Assigned manufacturing overhead	$11,483.44
Total Manufacturing Costs	$68,683.44
Product Margin (Sales - MF Costs)	$8,516.56

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you