Managerial Accounting

ADA University

School of Business

Full time

International MBA 2016

Student: Zakir Pashayev

Home Assignment

ADA University

School of Business

Full time

International MBA 2016

Student: Zakir Pashayev

Home Assignment

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Managerial Accounting

Dr. Elshan Rahimov

Baku, November 21, 2015

Managerial Accounting

Dr. Elshan Rahimov

Baku, November 21, 2015

Problem 6-17: Comparing Traditional and Activity-Based Product Margins

Precision Manufacturing Inc. (PMI) makes two types of industrial component parts-the EX300 and the TX500. An absorption costing income statement for the most recent period is shown below:

Precision Manufacturing Inc. Income Statement:

Sales | $ 1,700,000 |

Cost of Goods Sold | $ 1,200,000 |

Gross Margin | $ 500,000 |

Selling and Administrative Expenses | $ 550,000 |

Net Operating Loss | $ (50,000) |

PMI produced and sold 60,000 units of EX300 at price of $20 per unit and 12,500 units of TX500 at price of $40 per unit. The company’s traditional cost system allocates manufacturing overhead to products using plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company’s two product lines is shown below:

| EX300 | TX500 | Total |

Direct Materials | $ 366,325 | $ 162,550 | $ 528,875 |

Direct Labor | $ 120,000 | $ 42,500 | $ 162,500 |

Manufacturing Overhead | | | $ 508,625 |

Cost of Goods Sold | | | $ 1,200,000 |

The company has created an activity-based costing system to evaluate the profitability of its products. PMI’s ABC implementation team concluded that $50,000 and $100,000 of the company’s advertising expenses could be directly traced to EX300 and TX500, respectively. The remainder of the selling and administrative expenses was organization-sustaining in...