Feldpausch Corporation has provided the following data from its activity-based costing system: Activity Cost Pool Assembly Processing orders Total Cost Total Activity $1,668,848 59,200 machine-hours $57,099 2,090 orders inspection- Inspection 140,544 1,920 hours The company makes 1,310 units of product W26B a year, requiring a total of 1,870 machine-hours, 97 orders, and 35 inspection- hours per year. The product’s direct materials cost is $54.32 per unit and its direct labor cost is $15.89 per unit. The product sells for $122.50 per unit. According to the activity-based costing system, the product margin for product W26B is: (Round your intermediate calculations and final answers to 2 decimal places.)
The Correct Answer and Explanation is :
To calculate the product margin for product W26B, we need to follow several steps using the provided information and the activity-based costing (ABC) system.
Step 1: Calculate Activity Rates
The first step is to calculate the cost per unit of activity for each activity cost pool. This is done by dividing the total cost of each activity by the total activity level.
- Assembly Activity Rate:
[
\text{Assembly Rate} = \frac{\text{Total Cost of Assembly}}{\text{Total Machine-Hours}} = \frac{1,668,848}{59,200} = 28.17 \, \text{per machine-hour}
] - Processing Orders Activity Rate:
[
\text{Processing Orders Rate} = \frac{\text{Total Cost of Processing Orders}}{\text{Total Orders}} = \frac{57,099}{2,090} = 27.33 \, \text{per order}
] - Inspection Activity Rate:
[
\text{Inspection Rate} = \frac{\text{Total Cost of Inspection}}{\text{Total Inspection Hours}} = \frac{140,544}{1,920} = 73.18 \, \text{per inspection hour}
]
Step 2: Allocate Costs to Product W26B
Now, we allocate the costs for product W26B based on its activity usage.
- Assembly Cost:
[
\text{Assembly Cost} = \text{Assembly Rate} \times \text{Machine-Hours for W26B} = 28.17 \times 1,870 = 52,633.90
] - Processing Orders Cost:
[
\text{Processing Orders Cost} = \text{Processing Orders Rate} \times \text{Orders for W26B} = 27.33 \times 97 = 2,652.01
] - Inspection Cost:
[
\text{Inspection Cost} = \text{Inspection Rate} \times \text{Inspection Hours for W26B} = 73.18 \times 35 = 2,561.30
]
Step 3: Calculate Total Cost for Product W26B
The total cost for product W26B is the sum of the direct material cost, direct labor cost, and the allocated activity costs.
- Direct Materials Cost:
[
\text{Direct Materials Cost} = \text{Direct Materials Cost per Unit} \times \text{Units of W26B} = 54.32 \times 1,310 = 71,177.20
] - Direct Labor Cost:
[
\text{Direct Labor Cost} = \text{Direct Labor Cost per Unit} \times \text{Units of W26B} = 15.89 \times 1,310 = 20,822.90
] - Total Activity Costs:
[
\text{Total Activity Costs} = \text{Assembly Cost} + \text{Processing Orders Cost} + \text{Inspection Cost} = 52,633.90 + 2,652.01 + 2,561.30 = 57,847.21
] - Total Cost for W26B:
[
\text{Total Cost for W26B} = \text{Direct Materials Cost} + \text{Direct Labor Cost} + \text{Total Activity Costs} = 71,177.20 + 20,822.90 + 57,847.21 = 149,847.31
]
Step 4: Calculate Revenue
The revenue from selling W26B is given by:
[
\text{Revenue} = \text{Selling Price per Unit} \times \text{Units Sold} = 122.50 \times 1,310 = 160,975.00
]
Step 5: Calculate Product Margin
The product margin is the difference between the revenue and the total cost:
[
\text{Product Margin} = \text{Revenue} – \text{Total Cost for W26B} = 160,975.00 – 149,847.31 = 11,127.69
]
Final Answer:
The product margin for product W26B is $11,127.69.
Explanation:
This calculation uses activity-based costing (ABC) to allocate overhead costs based on the activities that drive them. Instead of using a simple overhead rate, ABC assigns costs based on machine-hours, orders processed, and inspection hours. These activity-based rates allow for a more accurate allocation of overhead, which is then combined with direct costs (materials and labor) to determine the overall cost of producing product W26B. By comparing this cost with the revenue, we find the product margin, which represents the amount of profit remaining after all expenses have been accounted for.