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Explain why the traditional and activity based cost
Course:- Managerial Accounting
Reference No.:- EM13963017




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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 a price of $20 per unit and 12,500 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:

634_260-B-M-A-A-B-C (904)-1.png

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 nature. The ABC team also distributed the company's manufacturing overhead to four activities as shown below:

2153_260-B-M-A-A-B-C (904)-2.png

Required: 

1. Using Exhibit 7-12 as a guide, compute the product margins for the EX300 and TX500 under the company's traditional costing system. 
2. Using Exhibit 7-10 as a guide, compute the product margins for EX300 and TX500 under the activity-based costing system. 
3. Using Exhibit 7-13 as a guide, prepare a quantitative comparison of the traditional and activity-based cost assignments. Explain why the traditional and activity-based cost assignmentsdiffer.




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