Flemming Corporation uses activity-based costing to compute product margins. Overhead costs have already been allocated to the company's three activity cost pools--Machining, Order Filling, and Other. The costs in those activity cost pools appear below: Machining costs are assigned to products using machine-hours (MHs) and Order Filling costs are assigned to products using the number of orders. The costs in the Other activity cost pool are not assigned to products. Activity data appear below:
Finally, sales and direct cost data are combined with Machining and Order Filling costs to determine product margins.
What is the product margin for Product U6 under activity-based costing?
A) $45,100
B) $11,296
C) $25,036
D) $8,600

Question

Flemming Corporation uses activity-based costing to compute product margins. Overhead costs have already been allocated to the company's three activity cost pools--Machining, Order Filling, and Other. The costs in those activity cost pools appear below:  Machining costs are assigned to products using machine-hours (MHs) and Order Filling costs are assigned to products using the number of orders. The costs in the Other activity cost pool are not assigned to products. Activity data appear below:
 Finally, sales and direct cost data are combined with Machining and Order Filling costs to determine product margins.
 What is the product margin for Product U6 under activity-based costing?
A) $45,100 
B) $11,296 
C) $25,036 
D) $8,600

Quizplus · Accepted Answer

To calculate the product margin for Product U6, we need to first allocate the overhead costs for Machining and Order Filling using their respective activity drivers.

Machining costs:

Product U6 requires 20 MHs of machining. The total machining cost is $171,000. Therefore, the machining cost allocated to Product U6 is:

(20 MHs ÷ 1,500 MHs) x $171,000 = $2,280

Order Filling costs:

Product U6 was ordered 40 times. The total order filling cost is $80,000. Therefore, the order filling cost allocated to Product U6 is:

(40 orders ÷ 1,000 orders) x $80,000 = $3,200

Direct costs for Product U6 are $35,000.

Therefore, the total product cost for U6 is:

$2,280 + $3,200 + $35,000 = $40,480

The sale price for Product U6 is $51,776.

Therefore, the product margin for U6 is:

$51,776 - $40,480 = $11,296

Therefore, the answer is choice B.

Flemming Corporation Uses Activity-Based Costing to Compute Product Margins