Accounting for Decision Making and Control 7th Edition by Jerold Zimmerman

Exercise 13

ABC and Taxes [1] 5
A plant manufactures two products, Hi-V and Lo-V. Hi-V is the high-volume product that represents most of the plant's revenue. It is produced 10 times per year, inventoried, and shipped to customers twice a month. Lo-V is a specialty product. It is made to order in small but frequent batches (usually once a week) and shipped immediately to customers. The plant uses an absorption costing system that assigns manufacturing overhead to products based on direct labor hours.
This table summarizes the annual cost structure and operating data for the plant.
A careful analysis of the plant's fixed overhead reveals that $350,000 of the $390,000 varies with the number of setups. The remaining $40,000 of fixed overhead will still be allocated to products based on direct labor hours.
There were no beginning inventories.
Required:
a. Compute product costs per unit of Hi-V and Lo-V using activity-based costing.
b. Prepare a table that compares the profits of the two product lines using the current absorption costing allocation method and activity-based costing.
c. Income taxes are 50 percent. Calculate the plant's total tax liability under absorption costing and under activity-based costing.
d. In general, will switching to activity-based costing lower a firm's taxes? Describe the general conditions necessary for activity-based costing to lower taxes.