Compute the operating income for each product line, using the activity-based overhead rates.

Exercise 4-1 (Part Level Submission)

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Wilkins Inc. has two types of handbags: standard and custom. The controller has decided to use a plantwide overhead rate based on direct labor costs. The president has heard of activity-based costing and wants to see how the results would differ if this system were used. Two activity cost pools were developed: machining and machine setup. Presented below is information related to the company’s operations.

Standard

Custom

Direct labor costs

$40,800

$111,000

Machine hours

1,230

1,340

Setup hours

100

380

Total estimated overhead costs are $304,000. Overhead cost allocated to the machining activity cost pool is $197,700, and $106,300 is allocated to the machine setup activity cost pool.

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(a)

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Compute the overhead rate using the traditional (plantwide) approach. (Round answers to 2 decimal places, e.g. 12.25%.)

Predetermined overhead rate

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% of direct labor cost

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(b)

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Compute the overhead rates using the activity-based costing approach. (Round answers to 2 decimal places, e.g. $12.25.)

Machining

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per machine hour

Machine setup

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per setup hour

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(c)

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Determine the difference in allocation between the two approaches. (Round answers to 0 decimal places, e.g. $1,225.)

Traditional costing

Standard

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Custom

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Activity-based costing

Standard

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Custom

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Exercise 4-2 (Part Level Submission)

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Ayala Inc. has conducted the following analysis related to its product lines, using a traditional costing system (volume-based) and an activity-based costing system. Both the traditional and the activity-based costing systems include direct materials and direct labor costs.

Total Costs

Products

Sales Revenue

Traditional

ABC

Product 540X

$208,800

$56,940

$46,460

Product 137Y

163,300

53,560

40,360

Product 249S

93,790

15,450

39,130

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(a)

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For each product line, compute operating income using the traditional costing system.

Product 540X

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Product 137Y

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Product 249S

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(b)

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For each product line, compute operating income using the activity-based costing system.

Product 540X

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Product 137Y

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Product 249S

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(c)

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Using the following formula, compute the percentage difference in operating income for each of the product lines of Ayala: [Operating Income (ABC) – Operating Income (traditional cost)] ÷ Operating Income (traditional cost). (Round answers to 2 decimal places, e.g. 12.25%. If difference is negative enter with either a - sign or in parenthesis, e.g. -12.25% or (12.25))

Product 540X

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%

Product 137Y

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%

Product 249S

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%

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Exercise 4-3 (Part Level Submission)

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American Fabrics has budgeted overhead costs of $1,077,120. It has allocated overhead on a plantwide basis to its two products (wool and cotton) using direct labor hours which are estimated to be 489,600 for the current year. The company has decided to experiment with activity-based costing and has created two activity cost pools and related activity cost drivers. These two cost pools are: cutting (cost driver is machine hours) and design (cost driver is number of setups). Overhead allocated to the cutting cost pool is $391,680 and $685,440 is allocated to the design cost pool. Additional information related to these pools is as follows.

Wool

Cotton

Total

Machine hours

108,800

108,800

217,600

Number of setups

1,088

544

1,632

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(a)

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Calculate the overhead rate using activity based costing and then calculate if the traditional approach were used. (Round answers to 2 decimal places, e.g. $12.25.)

Overhead rates for activity-based costing

Cutting

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per machine hour

Design

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per setup

Overhead rates using the traditional approach

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per direct labor hour

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(b)

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(1) Determine the amount of overhead allocated to the wool product line and the cotton product line using activity-based costing.

Wool product line

Cotton product line

Overhead Allocated

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(2) What amount of overhead would be allocated to the wool and cotton product lines using the traditional approach, assuming direct labor hours were incurred evenly between the wool and cotton?

Wool product line

Cotton product line

Overhead Allocated

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Exercise 4-5 (Part Level Submission)

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Shady Lady sells window coverings (shades, blinds, and awnings) to both commercial and residential customers. The following information relates to its budgeted operations for the current year.

Commercial

Residential

Revenues

$298,600

$477,500

Direct material costs

$29,000

$50,500

Direct labor costs

114,000

298,000

Overhead costs

81,800

224,800

149,200

497,700

Operating income (loss)

$73,800

($20,200

)

The controller, Peggy Kingman, is concerned about the residential product line. She cannot understand why this line is not more profitable given that the installations of window coverings are less complex for residential customers. In addition, the residential client base resides in close proximity to the company office, so travel costs are not as expensive on a per client visit for residential customers. As a result, she has decided to take a closer look at the overhead costs assigned to the two product lines to determine whether a more accurate product costing model can be developed. Here are the three activity cost pools and related information she developed:

Activity Cost Pools

Estimated Overhead

Cost Drivers

Scheduling and travel

$106,800

Hours of travel

Setup time

74,760

Number of setups

Supervision

49,440

Direct labor cost

Expected Use of Cost Drivers per Product

Commercial

Residential

Scheduling and travel

1,070

535

Setup time

420

300

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(a)

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Compute the activity-based overhead rates for each of the three cost pools. (Round the supervision overhead rate to 2 decimal places, e.g. 12% and all other answers to 2 decimal places, e.g. $12.25.)

Overhead Rate

Scheduling and travel

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Setup time

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Supervision

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%

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(b)

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Determine the overhead cost assigned to each product line. (Round Overhead Rate to 2 decimal places, 15.25 and final answers to 0 decimal places, e.g. $2,512.)

Commercial

Residential

Scheduling and travel

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Setup time

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Supervision

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Total assigned costs

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(c)

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Compute the operating income for each product line, using the activity-based overhead rates. (Round answers to 0 decimal places, e.g. $2,512.)

Commercial

Residential

Operating income

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