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?

Multiple Choice

• $7,996

• $23,356

• −$12,800

• $35,200

Answer 1

	Machining	Order Filling	Other	Total
Equipment depreciation	55200	18400	18400	92000
Supervisory expense	1200	800	2000	4000
Total	56400	19200	20400	96000
Activity rates:
Machining	2.82	=56400/20000
Order Filling	19.20	=19200/1000
Product W1 :
Sales	236500
Less: Costs
Direct materials (total)	90900
Direct labor (total)	110400
Machining	11844	=4200*2.82
Order Filling	15360	=800*19.20
Total costs	228504
Product margin for Product W1	7996
$7,996 is correct option