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AAA Company produces two products: bicycles and tricycles. The company uses traditional costing to allocate overhead costs, but is considering making a change to activity-based
AAA Company produces two products: bicycles and tricycles. The company uses traditional costing to allocate overhead costs, but is considering making a change to activity-based costing to provide better decision-making information. AAA Company tells us that they used $2,200 and $1,450 of direct materials to produce bicycles and tricycles, respectively, for the year. In addition, the company has a direct labor rate of $12 per direct labor-hour. Consider the additional information for AAA Company for the year: Product line Activity Usage Estimated Overhead Costs Bicycles Tricycles Total Activity Cost Pool(cost pool measure) Machine setups (number of setups) Special processing(direct labor hours) Customer deliveries(number of deliveries) $6,200 $4,800 $4,500 $15,500 60 50 24 40 30 36 100 80 60 Total overhead costs Number of bikes produced 100 60 Selling price per bike $200 $150 1. Using traditional costing and a plant-wide overhead rate based on direct labor-hours, what amount of total overhead costs was allocated to the Bicycles Product Line during the last year?$ 2. The company decides to implement activity-based costing using the cost pools and activity measures in the table above. What is the total overhead cost of the Bicycles Product Line for the year?$ 3. Under ABC, what is the gross margin(also known as gross profit) of the Bicycles Product Line last year? $ 4. How much was gross margin(also known as gross profit) understated for the year for the Bicycles Product Line under traditional costing(as compared to using ABC)
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