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 Cost Pool (and Activity Measure) Manufacturing Overhead Activity 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 2 Other (organizationsustaining 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.
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
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 Cost Pool (and
Activity Measure)
Manufacturing
Overhead
Activity
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 2
Other (organizationsustaining
costs) 117,000 NA NA NA
Total
overhead cost
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.
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