Precision Manufacturing Inc. (PMI) makes two types of industrial component parts

Question

Precision Manufacturing Inc. (PMI) makes two types of industrial component parts—the EX300 and the TX500. An absorption costing income statement for the most recent period is shown below:

     PMI produced and sold 60,000 units of EX300 at a price of $20 per unit and 12,500 units of TX500 at a price of $40 per unit. The company’s traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base.
Additional information relating to the company’s two product lines is shown below:

     The company has created an activity-based costing system to evaluate the profitability of its products. PMI’s ABC implementation team concluded that $50,000 and $100,000 of the company’s advertising expenses could be directly traced to EX300 and TX500, respectively. The remainder of the selling and administrative expenses was organization-sustaining in nature. The ABC team also distributed the company’s manufacturing overhead to four activities as shown below:

Activity

   

Compute the product margins for the EX300 and TX500 under the company’s traditional costing system.

Compute the product margins for EX300 and TX500 under the activity-based costing system.

Prepare a quantitative comparison of the traditional and activity-based cost assignments

Precision Manufacturing Inc. (PMI) makes two types of industrial component parts—the EX300 and the TX500. An absorption costing income statement for the most recent period is shown below:

Explanation / Answer

Compute the product margins for the EX300 and TX500 under the company’s traditional costing system

Compute the product margins for EX300 and TX500 under the activity-based costing system.

repare a quantitative comparison of the traditional and activity-based cost assignments

Predetermined overhead rate Estimated total manufacturing overhead cost /Estimated total direct labor dollars 508625/162500 =3.13 per DL$

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