Question - Blake Manufacturing produces three different products on three separate production areas within the same plant and uses a traditional job costing system to apply overhead costs based on direct labor costs. For the up-coming year, Blake is estimating overhead costs to be 450% of direct labor costs.
Projected volumes, selling prices, and direct costs for the three products are as follows:
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Blake Mfg.
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Product A
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Product B
|
Product C
|
|
Projected units
|
6,000
|
3,000
|
1,000
|
|
Direct materials/unit
|
$22
|
$25
|
$30
|
|
Direct labor/unit
|
$10
|
$12
|
$16
|
|
Selling price
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$98
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$115
|
$140
|
Upon closer examination of the overhead account, building costs make up 60% of the overhead costs, maintenance 25%, and supervisory costs 15%. Management is considering using an activity-based costing system to allocate overhead to production. Their analysis shows that floor space, machine hours and the number of employees are driving the building, maintenance, and supervisory costs, respectively. Activity levels are projected as follows:
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Activity
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Product A
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Product B
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Product C
|
|
Floor space (sq. ft.)
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12,000
|
30,000
|
18,000
|
|
Machine hours
|
1,500
|
5,000
|
3,500
|
|
No. of employees
|
45
|
20
|
35
|
Required:
a. Prepare an income statement by product line using traditional overhead allocation.
b. Prepare an income statement by product line using activity based costing to allocate overhead.
c. Explain the difference in total net operating profit for Blake Mfg. between the two methods.
d. Explain the difference in net operating profit by product line between the two methods.