Question

Mirabile Corporation uses activity-based costing to compute product margins. Overhead costs have already been allocated to the company's three activity cost pools--Processing, Supervising, and Other. The costs in those activity cost pools appear below:
Processing $3,870
Supervising $25,000
Other $11,500

Processing costs are assigned to products using machine-hours (MHs) and Supervising costs are assigned to products using the number of batches. The costs in the Other activity cost pool are not assigned to products. Activity data appear below:

MHs (Processing) Batches (Supervising)
Product M0 8,500 500
Product M5 500 500
Total 9,000 1,000

Finally, sales and direct cost data are combined with Processing and Supervising costs to determine product margins.

Product M0 Product M5
Sales (total) $81,500 $95,400
Direct materials (total) $29,600 $32,500
Direct labor (total) $28,900 $42,800

What is the product margin for Product M5 under activity-based costing?

Answer 1

Answer:The product margin for product M5 is $7,385

Explanation:

To calculate the product margin for product M5,

Processing 3,870 ÷ 9,000

= 0.43 per MH

Supervising 25,000 ÷ 1,000

= $25 per batch

To calculate the overhead cost for product M5

Processing 0.43 per MH × 500

= $215

Supervising $25 per batch × 500 batches

= $12,500

Total = $12,500 + $215

= $12,715

To calculate the product margin for product M5 under activity based costing

$

Sales. 95,400

Less:

Direct materials 32,500

Direct Labour 42,800

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Prime Cost. 75,300

Add: Overhead 12,715

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Total Cost of production. 88,015

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Product Margin. 7,385

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