Question

Sunland 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 $200,000 $53,000 $47,100
Product 137Y 162,000 48,000 29,000
Product 249S 92,000 25,000 49,900

Required:
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. Compute the percentage difference in operating income for each of the product lines of Ayala.

Answer 1

a. Traditional Cost

Product 540X

= Revenue - Cost

= 200,000 - 53,000

=$147,000

Product 137Y

= 162,000 - 48,000

= $114,000

Product 249S

= 92,000 - 25,000

= $67,000

B. ABC Costing

Product 540X

= Revenue - Cost

= 200,000 - 47,100

=$‭152,900‬

Product 137Y

= 162,000 - 29,000

= $‭133,000‬

Product 249S

= 92,000 - 49,900

= $‭42,100‬

c.

Difference in Income for 540X

`= (Income under ABC - Income under Traditional costing)/(Income under Traditional costing) \\\\= (152,900 - 147,000)/(147,000) \\\\= 0.0401`

= 4.01%

Difference in Income for 137Y

`= (Income under ABC - Income under Traditional costing)/(Income under Traditional costing) \\\\= (133,000 - 114,000)/(114,000) \\\\= 0.1667`

= 16.67%

Difference in Income for 249S

`= (Income under ABC - Income under Traditional costing)/(Income under Traditional costing) \\\\= (42,100 - 67,000)/(67,000) \\\\= -0.3716`

= -37.16%