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 |
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Sales | $ | 1,703,300 | |
Cost of goods sold | 1,257,146 | ||
Gross margin | 446,154 | ||
Selling and administrative expenses | 570,000 | ||
Net operating loss | $ | (123,846 | ) |
Hi-Tek produced and sold 60,400 units of B300 at a price of $20 per unit and 12,700 units of T500 at a price of $39 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 | $ | 400,000 | $ | 162,300 | $ | 562,300 |
Direct labor | $ | 120,300 | $ | 43,000 | 163,300 | |
Manufacturing overhead | 531,546 | |||||
Cost of goods sold | $ | 1,257,146 |
The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $56,000 and $105,000 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:
Manufacturing Overhead |
Activity | |||||
Activity Cost Pool (and Activity Measure) | B300 | T500 | Total | |||
Machining (machine-hours) | $ | 201,696 | 90,700 | 62,100 | 152,800 | |
Setups (setup hours) | 168,750 | 75 | 300 | 375 | ||
Product-sustaining (number of products) | 100,200 | 1 | 1 | 2 | ||
Other (organization-sustaining costs) | 60,900 | NA | NA | NA | ||
Total manufacturing overhead cost | $ | 531,546 |
3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.
Solution 1:
Computation of Product Margin - Traditional Costing System | |||
Particulars | B300 | T500 | Total |
Sales (B300 - 60,400*$20, T500 - 12700*$39) | $1,208,000 | $495,300 | $1,703,300 |
Direct material | $400,000 | $162,300 | $562,300 |
Direct labor | $120,300 | $43,000 | $163,300 |
Manufacturing overhead (Direct labor * $3.25503) | $391,580 | $139,966 | $531,546 |
Product Margin | $296,120 | $150,034 | $446,154 |
Solution 2:
Determination of activity rate for each activity & allocation of overhead | ||||||||
Activity | Estimated Overhead Cost | Activity Base | Usage of Activity Base | Activity Rate | B300 | T500 | ||
Usage | Allocated Costs | Usage | Allocated Costs | |||||
Machining | $201,696.00 | Machine hours | 152800 | $1.32 | 90700 | $119,724.00 | 62100 | $81,972.00 |
Setups | $168,750.00 | Setup hours | 375 | $450.00 | 75 | $33,750.00 | 300 | $135,000.00 |
Product sustaining | $100,200.00 | Number of products | 2 | $50,100.00 | 1 | $50,100.00 | 1 | $50,100.00 |
Other | $60,900.00 | No allocation | ||||||
Total | $531,546.00 | $203,574.00 | $267,072.00 |
Computation of Product Margin - Activity based Costing System | |||
Particulars | B300 | T500 | Total |
Sales (B300 - 60,400*$20, T500 - 12700*$39) | $1,208,000 | $495,300 | $1,703,300 |
Direct material | $400,000 | $162,300 | $562,300 |
Direct labor | $120,300 | $43,000 | $163,300 |
Allocated Manufacturing overhead | $203,574.00 | $267,072.00 | $470,646 |
Advertising Expense | $56,000.00 | $105,000.00 | $161,000.00 |
Product Margin | $428,126.00 | -$82,072.00 | $346,054.00 |
Solution 3:
Quantity comparison of traditional cost assignment | |||||
Particulars | B300 | T500 | Total | ||
Amount | % of total Amount | Amount | % of total Amount | Amount | |
Direct Material Cost | $400,000 | 71.1% | $162,300 | 28.9% | $562,300 |
Direct Labor Cost | $120,300 | 73.7% | $43,000 | 26.3% | $163,300 |
Manufacturing Overhead cost | $391,580 | 73.7% | $139,966 | 26.3% | $531,546 |
Total cost assigned to products | $911,880 | $345,266 | $1,257,146 | ||
Total cost not assigned to product: | |||||
Selling and administrative Expenses | $570,000.00 | ||||
Total Cost | $1,827,146 |
Quantity comparison of Activity Based cost assignment | |||||
Particulars | B300 | T500 | Total | ||
Amount | % of total Amount | Amount | % of total Amount | Amount | |
Direct Cost: | |||||
Material Cost | $400,000 | 71.1% | $162,300 | 28.9% | $562,300 |
Labor Cost | $120,300 | 73.7% | $43,000 | 26.3% | $163,300 |
Advertising Expense | $56,000 | 34.8% | $105,000 | 65.2% | $161,000 |
Indirect Cost: | |||||
Machining | $119,724 | 59.4% | $81,972 | 40.6% | $201,696 |
Setups | $33,750 | 20.0% | $135,000 | 80.0% | $168,750 |
Product sustaining | $50,100 | 50.0% | $50,100 | 50.0% | $100,200 |
Total Cost Assigned to Products | $779,874 | $577,372 | $1,357,246 | ||
Cost not assigned to products: | |||||
Manufacturing | $60,900 | ||||
Selling and administrative | $409,000 | ||||
Total Cost | $1,827,146 |
Hi-Tek Manufacturing, Inc., makes two types of industrial component parts—the B300 and the T500. An absorption...
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 $ 1,703,300 Cost of goods sold 1,257,146 Gross margin 446,154 Selling and administrative expenses 570,000 Net operating loss $ (123,846 ) Hi-Tek produced and sold 60,400 units of B300 at a price of $20 per unit and 12,700 units of T500 at a price of $39 per unit....
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 $ 1,703,300 Cost of goods sold 1,257,146 Gross margin 446,154 Selling and administrative expenses 570,000 Net operating loss $ (123,846 ) Hi-Tek produced and sold 60,400 units of B300 at a price of $20 per unit and 12,700 units of T500 at a price of $39 per unit....
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 $ 1,649,900 Cost of goods sold 1,254,430 Gross margin 395,470 Selling and administrative expenses 560,000 Net operating loss $ (164,530 ) Hi-Tek produced and sold 60,100 units of B300 at a price of $19 per unit and 12,700 units of T500 at a price of $40 per unit....
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