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Axel Manufacturing produces three different products in the same plant and uses a job order costing system to estimate product costs. Prepare a revised pro forma income statement by product line using activity-based costing.

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1. Axel Manufacturing produces three different products in the same plant and uses a job order costing system to estimate product costs. A flexible budget is used to forecast overhead costs. Total budgeted fixed factory overhead is \$450,000 and variable overhead is 120% of direct labor dollars.

Projected volumes, selling prices, and direct costs for the three products for the next calendar year are as follows:

Product AAA Product BBB Product CCC
Projected numbers of units 6000 3000 1000
Direct materials per unit \$22 \$25 \$30
Direct labor per unit \$11 \$12 \$16
Selling price \$98 \$115 \$140

Upon closer analysis of the overhead account, warehousing costs are determined to be a major fraction overhead. The manufacturing process requires six operations. Between operations, intermediate products are moved and warehoused to complete all six operations. But these products have different total cycle times because of different waiting times between operations. Cycle time is the total time from when raw materials are ordered until the product is completed and shipped Product AAA has the shortest cycle time (20 days ) because the large volume allows more accurate forecasts and more continuous scheduling of production. Product BBB has a total cycle time of 40 days; product CCC has a total cycle time of 50 days. Product BBB and CCC have longer warehousing times of work in process because of more frequent scheduling changes and supplier delays. Half of what is currently treated as fixed overhead cost is involved in the warehousing function.

Required:
a. Prepare a pro forma income statement by product line for the year based on full absorption costing. Product costs should include overhead assigned on direct labor cost.
b. Prepare a revised pro forma income statement by product line using activity-based costing.
c. Comment on the differences.

Solution Summary

In the point (a ) and ( b ) I calculated profit through traditional method and Activity Based Costing method respectively. In product AAA and BBB the difference of profit is not more in two methods but in case of Product CCC there is profit in traditional costing but loss in ABC costing

Solution Preview

ABC means Activity Based Costing. In the point (a ) ...

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