EXHIBIT 7-11 Product Margins-Activity-Based Costing A B C D E F 1 Product Margins-Activity-Based Costing 2 Standard Stanchions Custom Compass Housings 3 Sales $ 2,660,000 $ 540,000 4 Costs: 5 Direct materials $ 905,500 $ 69.500 6 Direct labor 263,750 87.500 7 Shipping 60,000 5,000 8 Customer orders (from Exhibit 7-9) 192,000 128.000 9 Product design (from Exhibit 7-9) 252,000 10 Order size (from Exhibit 7-9) 332.500 47 500 11 Total cost 1.753.750 589.500 12 Product margin S 906 250 S (49 500) 13 14 Exhibit 7-5 Exhibit 7-6 Exhibit 7-7 Exhibit 7-9 Exhibit 7-10 Exhibit 7-11 ExhibE x H I B I T 7 - 2 Classic Brass Income Statement Classic Brass Income Statement Year Ended December 31; 2017 Sales ....................................... Cost of goods sold: Direct materials ............................ $ 97 5,000 Direct labor ................................ 351,250 Manufacturing overhead' ................... 1,000,000 Gross margin ................................ Selling and administrative expenses: Shipping expense .......................... 65,000 General administrative expense .............. 510,000 Marketing expense ......................... 300,000 Net operating loss ............................ 2.326.250 873.750 875.000 $ (1.250) *The company's traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and machine-hours as the allocation base. Inventory levels did not change during the year. Activity-Based Costing: A Tool to Aid Decision Making 321 EXHIBIT 7-5 Results of Interviews: Distribution of Resource Consumption across Activity Cost Pools A D G H Activity Cost Pools Customer Product Customer 2 Orders Design Order Size Relations Other Totals Production Department 5 Indirect factory wages 25% 40% 20% 10% 5% 100% 6 Factory equipment depreciation 20% 0% 60% 0% 20% 100% Factory utilities 0% 10% 50% 0% 40% 100% Factory building lease 0% 0% 0% 100% 100% 10 General Administrative Department 11 Administrative wages and salaries 15% 5% 10% 30% 40% 100% 12 Office equipment depreciation 30% 0% 0% 25% 45% 100% 13 Administrative building lease 0% 0% 0% 0% 100% 100% 14 15 Marketing Department: 16 Marketing wages and salaries 22% 8% 0% 60% 10% 100% 17 Selling expenses 10% 0% 0% 70% 20% 100% 1 4 , H Exhibit 7-5 Exhibit 7-6 Exhibit 7-7 Exhibit 7-9 Exhibit 7-10 Exhibit 7-11 Exhibit 7-11 (2)04 EXHIBIT 7-6 First-Stage Allocations to Activity Cost Pools A C D E G Activity Cost Pools Customer Product Customer Orders Design Order Size Relations Other Totals 5 Production Department Indirect factory wages $ 125,000 $ 200.000 $ 100.000 5 50.000 5 25.000 S 500.000 6 Factory equipment depreciation 60.000 0 180,000 0 60.000 300.000 7 Factory utilities 12,000 60,000 48,000 120,000 8 Factory building lease 80.000 80,000 10 General Administrative Department 11 Administrative wages and salaries 60.000 20.000 40.000 120.000 160.000 400.000 12 Office equipment depreciation 15,000 0 12.500 22,500 50.000 Administrative building lease 60.000 60.000 15 Marketing Department 16 Marketing wages and salaries 65.000 20:000 50.000 25,000 250,000 17 Selling expenses 5.000 35 000 10.000 50.000 18 19 Total 5 320 000 5 252 0005 380 000 5/357 500 5 490 500 5 1 810 000 20 14 4 * * Exhibit 7-5 Exhibit 7-6 /Exhibit 7-7 /Exhibit 7-9 Exhibit.7-10 Exhibit 7-11 / Exhibit 7-11 (2)0 > Exhibit 7-5 shows that Customer Orders consume 25% of the resources represented by the $500,000 of indirected factory wages. 25% x $500,000 = $125,000 Other entries in the table are computed in a similar fashion.Activity-Based Costing: A Tool to Aid Decision Making 323 EXHIBIT 7-7 Computation of Activity Rates A B C D E F G (a) (b) (a) - (b) Activity Cost Pools Total Cost" Total Activity Activity Rate 2 Customer orders $320,000 1,000 orders $320 per order 3 Product design $252,000 400 designs $630 per design 4 Order size $380,000 20,000 MHs $19 per MH 5 Customer relations $367,500 250 customers $1,470 per customer 6 Other $490,500 Not applicable Not applicable 7 8 "From Exhibit 7-6. Exhibit 7-5 Exhibit 7-6 Exhibit 7-7 Exhibit 7-9 Exhibit 7-10 Exhibit 7-11 Exhibit ([