Royal Manufacturing, Inc

Subject:AccountingPrice:2.84 Bought3

Share With

Royal Manufacturing, Inc., makes two types of industrial component parts—the B300 and the T500. A traditional costing income statement for the most recent period is shown: Income Statement Sales $2,100,000 Cost of goods sold 1,600,000 Gross margin 500,000 Selling and administrative expenses 550,000 Net operating loss ... $ (50,000) Royal produced and sold 70,000 units of B300 at a price of $20 per unit and 17,500 units of T500 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: Direct materials Direct labor ..... Manufacturing overhead Cost of goods sold B300 T500 Total $436,300 $251,700 $ 688,000 $200,000 $104,000 304,000 608,000 $1,600,000 The company has created an activity-based costing system to evaluate the profitability of its products. Royal ABC implementation team concluded that $50,000 and $100,000 of the company's advertising expenses could be directly traced to B300 and T500, 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: Manufacturing Activity Activity Cost Pool (and Activity Measure) Overhead B300 T500 Total Machining (machine-hours).. $213,500 90,000 62,500 152,500 Setups (setup hours) 157,500 75 300 375 Product-sustaining (number of products) 120,000 1 1 2 Other (organization-sustaining costs) 117,000 NA NA NA Total manufacturing overhead cost. $608,000 Required: 1. compute the product margins for the B300 and T500 under the company's traditional costing system. compute the product margins for B300 and T500 under the activity-based costing system. prepare a quantitative comparison of the traditional and activity-based cost assignments. Explain why the traditional and activity-based cost assignments differ. 2. 3.