E3-3

Giles Company has two divisions. Gross margin computations for these two divisions for 20X2 are as follows:

	Standard Products		Custom Products
Sales	$	1,200,000		$	1,800,000
Direct materials		(200,000)			(300,000)
Direct labor		(600,000)			(600,000)
Manufacturing overhead*		(500,000)			(500,000)
Gross margin	$	100,000)	$	400,000
*Manufacturing overhead is allocated to production based on the amount of direct labor cost.

Giles has determined that its total manufacturing overhead cost of $1,000,000 is a mixture of batch-level costs and product-line costs. Giles has assembled the following information concerning the manufacturing overhead costs, the annual number of production batches in each division, and the number of product lines in each division:

Total Mfg. Overhead Costs

Standard Products

Custom Products

Batch-level manufacturing overhead $ 600,000 15 batches

Product-line manufacturing overhead 400,000 10 lines $1,000,000

60 batches 30 lines

1. Prepare gross margin calculations for Giles two divisions assuming that manufacturing overhead is allocated based on the number of batches and number of product lines.

2. By how much do the profits of the two divisions differ between the direct labor cost allocation method and ABC allocation? Assuming that allocating manufacturing overhead using the ABC method is more correct, what can you conclude from this difference?