Solutions

Chapter 7 Solutions, 3rd Day

Problem 7-17 (45 minutes)

1. Under the traditional direct labor-dollar based costing system, manufacturing overhead is applied to products using the predetermined overhead rate computed as follows:

The product margins using the traditional approach would be computed as follows:

| EX300 | TX500 | Total |

Sales | $1,200,000 | $500,000 | $1,700,000 |

Direct materials | 366,325 | 162,550 | 528,875 |

Direct labor | 120,000 | 42,500 | 162,500 |

Manufacturing overhead applied @ $3.13 per direct labor-dollar |     375,600 |  133,025 |    508,625 |

Total manufacturing cost |     861,925 |  338,075 |  1,200,000 |

Product margin | $  338,075 | $161,925 | $  500,000 |

Note that all of the manufacturing overhead cost is applied to the products under the company’s traditional costing system.

Problem 7-17 (continued)

2. The first step is to determine the activity rates:

| Activity Cost Pools | (a)

Total Cost | (b)

Total Activity | (a) ÷ (b)

Activity Rate |

| Machining | $198,250 | 152,500 | MHRs | $1.30 | per MHR |

| Setups | $150,000 | 375 | setup hrs. | $400 | per setup hr. |

| Product sustaining | $100,000 | 2 | products | $50,000 | per product |

*The Other activity cost pool is not shown above because it includes organization-sustaining and idle capacity costs that should not be assigned to products.

Under the activity-based costing system, the product margins would be computed as follows:

| EX300 | TX500 | Total |

Sales | $1,200,000 | $500,000 | $1,700,000 |

Direct materials | 366,325 | 162,550 | 528,875 |

Direct labor | 120,000 | 42,500 | 162,500 |

Advertising expense | 50,000 | 100,000 | 150,000 |

Machining | 117,000 | 81,250 | 198,250 |

Setups | 30,000 | 120,000 | 150,000 |

Product sustaining |      50,000 |    50,000 |     100,000 |

Total cost |    733,325 |  556,300 |  1,289,625 |

Product margin | $  466,675...