Question

8.         Encarnacion Corporation has an activity-based costing system with three activity cost pools-Processing, Supervising, and Other. In the first stage allocations, costs in the two overhead accounts, equipment expense and indirect labor, are allocated to the three activity cost pools based on resource consumption. Data used in the first stage allocations follow:

Overhead costs:
Equipment expense............... $77,000
Indirect labor.......................... $8,000

Distribution of Resource Consumption Across Activity Cost Pools:
Activity Cost Pools
Processing Supervising Other
Equipment expense 0.40 0.20 0.40
Indirect labor 0.30 0.20 0.50   

            Processing costs are assigned to products using machine-hours (MHs) and Supervising costs are assigned to products using the number of batches. The costs in the Other activity cost pool are not assigned to products. Activity data for the company's two products follow:

Activity:
MHs(Processing) Batches(Supervising)
Product Z1 8000 700
Product C6 12000 300
Total 20000 1000

            Finally, the costs of Processing and Supervising are combined with the following sales and direct cost data to determine product margins…

Sales and Direct Cost Data:
Product Z1 Product C6
Sales (total) $225100 154100
Direct materials(total) 122500 51000
Direct labor(total) 71100 72400

            What is the product margin for Product C6 under activity-based costing?

$5,680

$41,700

$30,700

$12,480

Answer 1

	Processing	Supervising
Equipment expense:
77000 X 0.4	30800
77000 X 0.2		15400
Indirect labor:
8000 X 0.3	2400
8000 X 0.2		1600
Total overhead	33200	17000
Activity	Activity rate
Processing	1.66	=33200/20000
Supervising	17	=17000/1000
Sales		154100
Costs:
Direct materials	51000
Direct labor	72400
Overhead assigned:
Processing	19920		=12000*1.66
Supervising	5100		=300*17
Total costs		148420
Product margin for Product C6		5680
Option 1 $5,680 is correct