1 - Explain why the traditional and activity-based cost assignments differ.2 - What advice would you give the management of Jackson Manufacturing regarding pricing of products in the future. Jackson Manufacturing, Inc., makes two types of industrial component parts-the XT-100 and the LT-200. An absorption costing income statement for the most recent periodis shown:Jackson Manufacturing Inc.Income StatementSales$2,100,000Cost of goods sold1,600,000Gross margin500,000Selling and administrative expenses550,000Net operating loss$ (50,000)Table Summary: Income statement with two-line heading. Descriptions of incomeitems are in first column and dollar values in second column.Jackson produced and sold 70,000 units of XT-100 at a price of $20 per unit and 17,500units of LT-200 at a price of $40 per unit. The company's traditional cost systemallocates manufacturing overhead to products using a plantwide overhead rate anddirect labor dollars as the allocation base. Additional information relating to thecompany's two product lines is shown below:XT-100LT-200TotalDirect materials$436,300 $251,700$ 688,000Direct labor$200,000 $104,000304,000Manufacturing overhead608,000Cost of goods sold$1,600,000The company has created an activity-based costing system to evaluate the profitabilityof its products. Jackson's ABC implementation team concluded that $50,000 and$100,000 of the company's advertising expenses could be directly traced to XT-100 andLT-200, respectively. The remainder of the selling and administrative expenses wasorganization-sustaining in nature. The ABC team also distributed the company'smanufacturing overhead to four activities as shown: ActivityActivity Cost Pool (andActivity Measure)ManufacturingOverheadXT-100LT-200TotalMachining (machine-hours) $213,50090,00062,500152,500Setups (setup hours)157,50075300375Product-sustaining (numberof products)120,00011Other (organization-sustaining costs)117,000NANANATotal manufacturingoverhead cost$608,000Table Summary: Table shows activity data for two products. First column lists activitycost pools and activity measures. Second column shows manufacturing overhead foreach cost pool. Columns 3-5 show activity numbers for the two products and theirtotals. The XT-100, LT-200, and Total columns are under the spanner headingActivity.Required:1. Compute the product margins for the XT-100 and LT-200 under thecompany's traditional costing system.2. Compute the product margins for XT-100 and LT-200 under the activity-basedcosting system.3. Explain why the traditional and activity-based cost assignments differ.4. What advice would you give the management of Jackson Manufacturingregarding pricing of products in the future.2.

Activity-based costing is a costing approach in which a company's activities are identified and the…

Answered: 1 - Explain why the traditional and…

1 - Explain why the traditional and activity-based cost assignments differ. 2 - What advice would you give the management of Jackson Manufacturing regarding pricing of products in the future.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Concept explainers

Manufacturing Costs

Manufacturing cost is the total cost of procuring or producing a product. In other words, the manufacturing cost is the cost that an individual or business owner undertakes for the manufacturing of goods.

Question

1 - Explain why the traditional and activity-based cost assignments differ.

2 - What advice would you give the management of Jackson Manufacturing regarding pricing of products in the future.

Jackson Manufacturing, Inc., makes two types of industrial component parts-the XT-
100 and the LT-200. An absorption costing income statement for the most recent period
is shown:
Jackson Manufacturing Inc.
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)
Table Summary: Income statement with two-line heading. Descriptions of income
items are in first column and dollar values in second column.
Jackson produced and sold 70,000 units of XT-100 at a price of $20 per unit and 17,500
units of LT-200 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:
XT-100
LT-200
Total
Direct materials
$436,300 $251,700
$ 688,000
Direct labor
$200,000 $104,000
304,000
Manufacturing overhead
608,000
Cost of goods sold
$1,600,000
The company has created an activity-based costing system to evaluate the profitability
of its products. Jackson's ABC implementation team concluded that $50,000 and
$100,000 of the company's advertising expenses could be directly traced to XT-100 and
LT-200, 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:

Activity
Activity Cost Pool (and
Activity Measure)
Manufacturing
Overhead
XT-100
LT-200
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
Other (organization-
sustaining costs)
117,000
NA
NA
NA
Total manufacturing
overhead cost
$608,000
Table Summary: Table shows activity data for two products. First column lists activity
cost pools and activity measures. Second column shows manufacturing overhead for
each cost pool. Columns 3-5 show activity numbers for the two products and their
totals. The XT-100, LT-200, and Total columns are under the spanner heading
Activity.
Required:
1. Compute the product margins for the XT-100 and LT-200 under the
company's traditional costing system.
2. Compute the product margins for XT-100 and LT-200 under the activity-based
costing system.
3. Explain why the traditional and activity-based cost assignments differ.
4. What advice would you give the management of Jackson Manufacturing
regarding pricing of products in the future.
2.

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