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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...