Chapter 07s

# 9000000 6000000 15000000 direct labor 7000000 5000000

• Notes
• 38

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9,000,000 6,000,000 15,000,000 Direct labor 7,000,000 5,000,000 12,000,000 The first step in computing product margins is to gather each product’s sales and direct cost data.

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7-31 Plantwide manufacturing overhead rate \$14,000,000 800,000 MH = \$17.50 per machine-hour = The second step in computing product margins is to  compute the plantwide overhead rate.  Production Department Indirect factory wages 6,000,000 \$ Factory equipment depreciation 3,500,000 Factory utilities 2,500,000 Factory building lease 2,000,000 Total manufacturing overhead 14,000,000 \$ Manufacturing Overhead Costs at Baxter Battery Machine-hours SureStarts (800,000 @ 0.60 hours) 480,000 LongLifes (400,000 @ 0.80 hours) 320,000 Total machine-hours 800,000 Product Margins Computed Using  the Traditional Cost System
7-32 The third step in computing product margins is allocate manufacturing overhead to each product. Machine Overhead Overhead Hours Rate Allocated SureStarts 480,000 17.50 \$ 8,400,000 \$ LongLifes 320,000 17.50 5,600,000 Total overhead allocated to products 14,000,000 \$ 480,000 hours × \$17.50 per hour = \$8,400,000 Product Margins Computed Using  the Traditional Cost System

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7-33 The fourth step is to actually compute the  product margins. Sales 31,300,000 \$ 18,700,000 \$ 50,000,000 \$ Cost of goods sold Direct materials 9,000,000 \$ 6,000,000 \$ 15,000,000 \$ Direct labor 7,000,000 5,000,000 12,000,000 Manufacturing overhead 8,400,000 24,400,000 5,600,000 16,600,000 14,000,000 41,000,000 Product margin 6,900,000 \$ 2,100,000 9,000,000 Selling and administrative 11,000,000 Ne t operating loss (2,000,000) \$ SureStarts LongLifes Total Shipping expenses 3,000,000 \$ Marketing expenses 2,000,000 General administrative expenses 6,000,000 11,000,000 \$ Product Margins Computed Using  the Traditional Cost System
7-34 SureStarts LongLifes Product margins – traditional 6,900,000 \$ 2,100,000 \$ Product margins – ABC 8,372,000 (1,132,000) Change in reported margins 1,472,000 \$ (3,232,000) \$ The traditional cost system overcosts the SureStarts and reports a lower product margin for this product. The traditional cost system undercosts the LongLifes and reports a higher product margin for this product. Differences Between ABC and  Traditional Product Costs

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7-35 Differences Between ABC and  Traditional Product Costs Traditional costing allocates all manufacturing     overhead to products.  ABC costing only assigns     manufacturing overhead costs consumed by     products to those products.  There are three reasons why the reported product margins for the two costing systems differ from one another.
7-36 Differences Between ABC and  Traditional Product Costs  Traditional costing allocates all manufacturing overhead costs using a volume-related allocation base. ABC costing also uses non-volume related allocation bases. There are three reasons why the reported product margins for the two costing systems differ from one another.

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7-37 Differences Between ABC and  Traditional Product Costs   Traditional costing disregards selling and     administrative expenses because they are     assumed to be period expenses. ABC costing     directly traces shipping costs to products and     includes nonmanufacturing overhead costs caused     by products in the activity cost pools that are     assigned to products.
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• Fall '12
• StephenD.Joyce
• activity cost pools, Baxter Battery, General Administrative Department

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