MTI makes three types of lawn tractors: M3100, M4100, and M6100. In the past, it

Question

MTI makes three types of lawn tractors: M3100, M4100, and M6100. In the past, it allocated overhead to products using machine-hours. Last year, the company produced 9,000 units of M3100, 19,000 units of M4100, and 9,000 units of M6100 and had the following revenues and costs:

MTI’s controller has heard about activity-based costing and puts together an employee team to recommend cost allocation bases. The employee team recommends the following:

The employee team recommends that plant administration costs not be allocated to products.

Required:

a. Using machine-hours to allocate overhead, complete the income statement for MTI. Do not allocate plant administrative costs to products. (Do not round intermediate calculations.)

b. Complete the income statement using the activity-based costing method suggested by the employee team.

MTI Income Statement M3100 M4100 M6100 Total Sales revenue $ 8,900,000 $ 14,000,000 $ 14,500,000 $ 37,400,000 Direct costs Direct materials 2,700,000 4,500,000 3,100,000 10,300,000 Direct labor 590,000 890,000 1,720,000 3,200,000 Variable overhead Setting up machines 2,400,000 Processing sales orders 1,680,000 Warehousing 2,340,000 Operating machines 1,250,000 Shipping 851,000 Contribution margin $ 15,379,000 Plant administration 6,100,000 Gross profit $ 9,279,000

Explanation / Answer

a. MTI

Income Statement

b. MTI

Income Statement

Computation of Overhead Activity Rates :

M3100 Per Unit M4100 Per Unit M6100 Per Unit Total $ $ $ $ Sales Revenue 8,900,000 988.89 14,000,000 736.84 14,500,000 1,611.11 37,400,000 Direct Costs Direct Materials 2,700,000 300.00 4,500,000 236.84 3,100,000 344.44 10,300,000 Direct Labor 590,000 655.56 890,000 46.84 1,720,000 191.11 3,200,000 Variable Overhead 2,215,460 246.16 2,999,392 157.86 3,306,148 367.35 8,521,000 Contribution Margin 3,394,540 377.17 5,610,608 295.30 6,373,852 708.21 15,379,000 Plant Administration 6,100,000 Net Operating Income 9,279,000

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