Question

Ayala Inc. has conducted the following analysis related to its product lines, using a traditional costing system (volume-based) and an activity-based costing system. Both the traditional and the activity-based costing systems include direct materials and direct labor costs.

Products Sales Revenue Traditional ABC
Product 540X $195,000 $56,000 $46,600
Product 137Y 158,000 55,000 37,000
Product 249S 84,000 10,000 37,400
Instructions
a) For each product line, compute operating income using the traditional costing system.
b) For each product line, compute operating income using the activity-based costing system
c) Using the following formula, compute the percentage difference in operating income for each of the product lines of Ayala:{Operating Income (ABC)-Operating Income traditional cost)]divided operating Income (traditional cost)(round the percentage to two decimals).

Answer 1

a. Operating income of Product 540X under traditional costing system: Operating income = Revenue - Operating cost = $195,000 - $56,000 = $139,000

Operating income of Product 137Y under traditional costing system: Operating income = Revenue - Operating cost = $158,000 - $55,000 = $103,000

Operating income of Product 249S under traditional costing system: Operating income = Revenue - Operating cost = $84,000 - $10,000 = $74,000

b. Operating income of Product 540X under activity-based costing system: Operating income = Revenue - Operating cost = $195,000 - $46,600 = $148,400

Operating income of Product 137Y under activity-based costing system: Operating income = Revenue - Operating cost = $158,000 - $37,000 = $121,000

Operating income of Product 249S under activity-based costing system: Operating income = Revenue - Operating cost = $84,000 - $37,400 = $46,600

c. % of the difference between the operating income of Product 540X under traditional costing system and ABC system = Operating Income (ABC) - [Operating Income (Traditional cost)/Operating Income (Traditional cost)] * 100

= $148,400 - $139,000/$139,000 * 100

= $9,400/$139,000 * 100

= 0.0676258992805755 * 100

= 6.76%

% of the difference between the operating income of Product 137Y under traditional costing system and ABC system = Operating Income (ABC) - [Operating Income (Traditional cost)/Operating Income (Traditional cost)] * 100

= $121,000 - $103,000/$103,000 * 100

= $18,000/$103,000*100

= 0.1747572815533981 * 100

= 17.48%

% of the difference between the operating income of Product 249S under traditional costing system and ABC system = Operating Income (ABC) - [Operating Income (Traditional cost)/Operating Income (Traditional cost)] * 100

= $46,600 - $74,000/$74,000 * 100

= -$27,400/$74,000 * 100

= -0.3702702702702703 * 100

= -37.03%