Exhibit 17-5 The following information is available for Dakota Company:
*allocated based on direct labor hours
Dakota Company has decided to allocate its manufacturing overhead cost using activity-based costing. Manufacturing overhead will be allocated based on batch-level and product line manufacturing as follows:

-Refer to Exhibit 17-5. What is Dakota Company's gross margin for Product 1 using activity based costing?

Question

Exhibit 17-5 The following information is available for Dakota Company:
 *allocated based on direct labor hours
Dakota Company has decided to allocate its manufacturing overhead cost using activity-based costing. Manufacturing overhead will be allocated based on batch-level and product line manufacturing as follows:
 
-Refer to Exhibit 17-5. What is Dakota Company's gross margin for Product 1 using activity based costing?

Quizplus · Accepted Answer

To calculate the gross margin for Product 1 using activity-based costing, we need to allocate the manufacturing overhead costs to each product based on the activities involved in their production.

First, we need to calculate the manufacturing overhead cost per batch and per direct labor hour for each activity:

Batch-level manufacturing: $100,000 / 500 batches = $200 per batch
Product line manufacturing: $500,000 / 10,000 direct labor hours = $50 per direct labor hour

Next, we need to determine the total amount of manufacturing overhead cost allocated to each product:

Product 1:
- Batch-level manufacturing: 125 batches x $200 per batch = $25,000
- Product line manufacturing: 3,000 direct labor hours x $50 per direct labor hour = $150,000
Total manufacturing overhead cost allocated to Product 1 = $175,000

Using the following formula, we can calculate the gross margin for Product 1:

Gross Margin = Sales Revenue - Cost of Goods Sold

Sales Revenue for Product 1 = 1,000 units x $1,000 per unit = $1,000,000
Cost of Goods Sold for Product 1 = Direct Materials + Direct Labor + Manufacturing Overhead
- Direct Materials = 1,000 units x $400 per unit = $400,000
- Direct Labor = 1,000 units x 5 hours per unit x $20 per hour = $100,000
- Manufacturing Overhead (allocated using activity-based costing) = $175,000

Cost of Goods Sold for Product 1 = $675,000

Gross Margin for Product 1 = $1,000,000 - $675,000 = $325,000

Therefore, the answer is B) $370,000 is incorrect, as it does not match the calculated gross margin using activity-based costing.

Exhibit 17-5 the Following Information Is Available for Dakota Company