Question

Hi-Tek Manufacturing, Inc., makes two types of industrial component parts—the B300 and the T500. An absorption costing income statement for the most recent period is shown:

Hi-Tek Manufacturing Inc. Income Statement

Sales $ 2,100,000

Cost of goods sold 1,600,000

Gross margin 500,000

Selling and administrative expenses 550,000

Net operating loss $ (50,000 )

Hi-Tek produced and sold 70,000 units of B300 at a price of $20 per unit and 17,500 units of T500 at a price of $40 per unit. The company’s traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company’s two product lines is shown below:

B300 T500 Total

Direct materials $ 436,300 $ 251,700 $ 688,000

Direct labor $ 200,000 $ 104,000 304,000

Manufacturing overhead $608,000

Cost of goods sold $ 1,600,000

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $50,000 and $100,000 of the company’s advertising expenses could be directly traced to B300 and T500, respectively. The remainder of the selling and administrative expenses was organization-sustaining in nature. The ABC team also distributed the company’s manufacturing overhead to four activities as shown below:

Activity Cost Pool and Activity Measure Manufacturing Overhead Activity

B300 B500 Total

Machining (Machine Hours) $213,500 90,000   62,500 152,500

Setups (setup hours) 157,500 75 300 375

Product-sustaining (number of products) 120,000 1 1 2

Other (Organization-sustaining costs) 117,000 NA NA NA

TOTAL MANUFACTURING OVERHEAD COST $608,000

  Required:

1. Compute the product margins for the B300 and T500 under the company’s traditional costing system.

2. Compute the product margins for B300 and T500 under the activity-based costing system.

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.

Answer 1

Answers 1 Product Margin under Traditional Costing Т500 Total B300 Product Margin 2 Product Margin under Activity Based costing 500000 363700 136300 Т500 Total В300 Product Margin 496200 29200 467000

3. Quantitative Comparision of the Traditional and Activity Based Cost Assignments Quantitative comparsion of the Traditional Cost Total Т500 В30 Traditional Costing System Direct Material Direc tLabor Manufacturing Overheads Total Cost Assigned to Products Selling and Administrative Expenses Total Cost Amount Amount 436300 63.4% 251700 36.6% 688000 65.8% 200000 104000 34.2% 304000 65.8% 34.2% 608000 400000 208000 563700 1600000 1036300 550000 2150000

Quantitative Comparison of Acticity Based Cost Assignments Total Т500 В300 Activty Based Costing System Direct Cost Direct Material Direct Labor Advertisements (Traced) Indirect Cost Machining Batch setup Prodcut Sustainind Total Cost Assigned to Products Cost Not asigned to the Products Selling and Administrative Expenses Amount Amount 251700 436300 63.4% 36.6% 688000 65.8% 200000 104000 34.2% 304000 50000 150000 33.3% 100000 66.7% 59.0% 87500 41.0% 213500 126000 20.0% 31500 126000 157500 80.0% 120000 50.0% 60000 50.0% 60000 903800 729200 1633000 400000 Others 117000 Total Cost 2033000

Working Notes Total взоо Т500 Selling Price Direct Material Direct Labor Production in Units Manufacturing Overheads Advertisements (Traced) Selling and Administrative Expenses Maufacturing OH Estimated Labor Dollars 20 40 436300 251700 688000 200000 104000 304000 70000 17500 87500 608000 50000 100000 550000 608000 304000 2.00 608000/304000 2 Predetermined Overhead Rate |мон Activity Total 62500 152500 B300 T500 Machining Setups Prodcut sustaining 213500 90000 157500 75 300 375 120000 1 1 2 Others 117000 608000 Traditional Costing System Total взоо Т500 sales Direct Material Direct Labor Manufacturing Overheads Total Manufacturing Cost Product Margin 1400000 700000 2100000 436300 251700 000889 200000 104000 304000 400000 208000 608000 563700 1036300 1600000 363700 136300 500000

Determination of Activity Rate Activty Pool Machining Batch setup Prodcut Sustaining Estimated OH Base Activity Rate 152500 213500 1.40 157500 375 420.00 120000 2 60000 Activity Based Costing System Total Т500 В300 sales Direct Material Direct Labor Advertisements (Traced) Machining Batch setup Prodcut Sustaining Total Cost Product Margin 1400000 700000 2100000 251700 436300 688000 200000 104000 304000 50000 150000 100000 87500 213500 126000 31500 126000 157500 60000 60000 120000 903800 729200 1633000 496200 29200 467000