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. ProductsSales RevenueTraditionalABC
Product 540X198,20054,44045,520
Product 137Y158,70049,09039,290
Product 249S83,19011,29030,010
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.

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