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$ 3,150 supervising$ 25,300 other $ 10,500 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 m09,900550 product m5600550 total10,5001,100 finally, sales and direct cost data are combined with processing and supervising costs to determine product margins. Product m0product m5 sales (total)$ 74,900$ 90,400 direct materials (total)$ 28,600$ 31,500 direct labor (total)$ 27,900$ 41,800. What is the product margin for product m5 under activity-based costing?

a. $2,780
b. $17,100
c. $18,400
d. $4,270

Answer 1

Using activity-based costing, Product M5 has a processing cost of $1,650 and a supervising cost of $12,650. When combined with direct materials ($31,500) and direct labor ($41,800), the total cost is $87,600. Subtracting this from the sales of $90,400 yields a product margin of approximately $2,800, which is closest to option A ($2,780).

Step-by-step explanation:

Firstly, to calculate the product margin for Product M5 under activity-based costing, we need to perform several steps incorporating the allocation of overhead costs to products based on activity drivers and then subtracting the total costs from sales. The overhead costs are distributed to products based on machine-hours (for processing costs) and the number of batches (for supervising costs). Here's the calculation:

The overhead cost per machine-hour (MH) for processing is
$3,150 / 10,500 MHs = $0.30 per MH.
Product M5 uses 5,500 MHs, so its processing cost is 5,500 MHs x $0.30 per MH = $1,650.

The overhead cost per batch for supervising is
$25,300 / 1,100 batches = $23 per batch.
Product M5 has 550 batches, so its supervising cost is 550 batches x $23 per batch = $12,650.

Summing up the direct materials, direct labor, processing, and supervising costs for Product M5 gives us a total cost of:
$31,500 (direct materials) + $41,800 (direct labor) + $1,650 (processing) + $12,650 (supervising) = $87,600.

Subtracting the total cost from sales for Product M5 yields the product margin:
$90,400 (sales) - $87,600 (total costs) = $2,800.

As the value $2,800 is not listed in the options provided (there probably was a typo in the options or calculation), but it is closest to option A ($2,780), we can suggest that Option A ($2,780) most likely represents the product margin for Product M5, assuming there's been a slight error in the figures provided or in the answer options.