Ayala 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 198,200 54,440 45,520

Product 137Y 158,700 49,090 39,290

Product 249S 83,190 11,290 30,010

Instructions

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) Using the following formula, compute the percentage difference in operating income for each of the product lines of Ayala:{Operating Income (ABC) - Operating Income traditional cost) ]divided operating Income (traditional cost) (round the percentage to two decimals).

Answer and Explanation:

a. The computation of operating income using the traditional costing system is shown below:-

Product Sales Revenue Traditional Operating income

540X $198,200 $54,440 $143,760

137Y $158,700 $49,090 $109,610

249S $83,190 $11,290 $71,900

Therefore for reaching the operating income we simply deduct the traditional from sales revenue of every product.

b. The computation of operating income using the activity-based costing system is shown below:-

Products Sales Revenue ABC Operating income

540X $198,200 $45,520 $152,680

137Y $158,700 $39,290 $119,410

249S $83,190 $30,010 $53,180

So, for reaching the operating income we simply deduct the ABC from sales revenue of every product.

c. The computation of percentage difference in operating income for each of the product lines is shown below:-

Products Operating Income Operating Income Percentage

(ABC) traditional cost difference

540X $152,680 $143,760 6.20%

137Y $119,410 $109,610 8.94%

249S $53,180 $71,900 - 26.04%

Now, to reach the percentage difference we simply deduct the operating income traditional cost from operating income and after the result we divide by operating income traditional cost.