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ACCT 386 - Week 5 - Homework - Question 1

ACCT 386 - Week 5 - Homework - Question 1
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ACCT 386 - Week 5 - Homework - Question 1

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Question 1

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

$

1,655,800  

  Cost of goods sold

 

1,220,966  

 



  Gross margin

 

434,834  

  Selling and administrative expenses

 

550,000  

 



  Net operating loss

$

(115,166) 

 






     PMI produced and sold 60,200 units of EX300 at a price of $19 per unit and 12,800 units of TX500 at a price of $40 per unit. The company’s traditional cost system allocates manufacturing overhead to products using a 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

$

400,800  

$

162,400  

$

563,200  

  Direct labor

$

120,200  

$

42,900  

 

163,100  

  Manufacturing overhead

 

 

 

 

 

494,666  

 

 

 

 

 



  Cost of goods sold

 

 

 

 

$

1,220,966  

 

 

 

 

 






     The company has created an activity-based costing system to evaluate the profitability of its products. PMI’s ABC implementation team concluded that $51,000 and $102,000 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 nature. The ABC team also distributed the company’s manufacturing overhead to four activities as shown below:

 

Manufacturing

Activity

  Activity Cost Pool (and Activity Measure)

Overhead

EX300

TX500

Total

  Machining (machine-hours)

 $

213,226     

91,000  

62,400  

153,400  

  Setups (setup hours)

 

120,540     

74  

220  

294  

  Product-sustaining (number of products)

 

100,600     

1  

1  

2  

  Other (organization-sustaining costs)

 

60,300     

NA  

NA  

NA  

 



 

 

 

  Total manufacturing overhead cost

$

494,666