Comparing Traditional and Activity-Based Product Margins [LO1, LO3, LO4, LO5]

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 profi tability 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:

Required:
1. Using Exhibit 7–12 as a guide, compute the product margins for the EX300 and TX500 under the company’s traditional costing system.
2. Using Exhibit 7–10 as a guide, compute the product margins for EX300 and TX500 under the activity-based costing system.
3. Using Exhibit 7–13 as a guide, prepare a quantitative comparison of the traditional and activity-based cost assignments. Explain why the traditional and activity-based cost assignments di ffer.

Transcribed Image Text:

Sales.... Precision Manufacturing Inc. Income Statement $1,700,000 Cost of goods sold. Gross margin... Selling and administrative expenses. Net operating loss.... 1,200,000 500,000 550,000 $ (50,000)