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 Cost of goods sold Gross margin Selling and administrative expenses Net operating loss 1,718,000 1,205,668 512.332 650.000 $ (137,668) Hi-Tek produced and sold 60,500 units of B300 at a price of $20 per unit and 12,700 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: T500 162,900 $ 42,500 $ ,600 $ 120,00 $ Total 563,500 163,100 Direct materials Direct labor Manufacturing overhead Cost of goods sold $ 1,205,668 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 $ 201,168 116,800 100,400 60,500 $ 478,63 Activity 300 T500 90,400 62.000 72220 Activity Cost Pool (and Activity Measure) Machining (machine-hours) Setups (setup hours) Product-sustaining (number of products) Other (organization-sustaining costs) Total manufacturing overhead cost Total 152,400 292 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 B300 Product Margin 334656 2 Product Margin under Activity Based costing B300 Product Margin 434272 T500 178075 Total 512731 T500 -22440 Total 411832

3. Quantitative Comparision of the Traditional and Activity Based Cost Assignments Quantitative comparsion of the Traditional Cost B300 T500 Total Traditional Costing System Direct Material DirectLabor Manufacturing Overheads Total Cost Assigned to Products Selling and Administrative Expenses Total Cost Amount 400600 120800 353944 875344 % 71.1% 74.0% 74.0% Amount 162900 42500 124525 329925 % 28.9% 26.0% 26.0% 563500 163300 478469 1205269 650000 1855269

Total 563500 163300 161000 Quantitative Comparison of Acticity Based Cost Assignments B300 T500 Activty Based Costing System Amount % Amount Direct Cost Direct Material 400600 71.1% 162900 Direct Labor 120800 74.0% 42500 26.0% Advertisements (Traced) 56000 34.8% 105000 65.2% Indirect Cost Machining 119328 59.3% 81840 40.7% Batch setup 28800 24.7% 88000 75.3% Prodcut Sustainind 50200 50.0% 50200 50.0% Total Cost Assigned to Products | 775728 530440 Cost Not asigned to the Products Selling and Administrative Expenses Others Total Cost 201168 116800 100400 1306168 489000 60500 1795168

Working Notes IB300 L T500 Total Selling Price 201 40 Direct Material 400600 162900 563500 Direct Labor 120800 4 2500 163300 Production in Units 60500 12700 73200 Manufacturing Overheads 478868 Advertisements (Traced) 56000 105000 Selling and Administrative Expenses 650000 Maufacturing OH 478868 Estimated Labor Dollars 1633001 3 Predetermined Overhead Rate 2.93478868/163300 IMOH Activity B300 T500 Total Machining 201168 9 0400 62000 152400 Setups 116800 72 220 292 Prodcut sustaining 1004001 Others 605001 478868 sales Direct Material Direct Labor Manufacturing Overheads Total Manufacturing Cost Product Margin Traditional Costine System B300 T500 Total 1210000 5080001 1718000 400600 162900 563500 120800 42500 163300 353944 124525 478469 8753441 3299251 1205269 334656 178075 512731

Activity Rate Determination of Activity Rate Activty Pool Machining Batch setup Prodcut Sustaining 1.32 Estimated OH 201168 116800 100400 Base 152400 292 2 400.00 50200 Activity Based Costing System sales Direct Material Direct Labor Advertisements (Traced) Matching Activity *Rate) Batch Setup (Activity * Rate) Prodcut Sustaining Total Cost Product Margin B300 1210000 400600 120800 56000 119328 28800 50200 775728 434272 T500 Total 508000 1718000 162900 563500 42500 163300 105000 161000 81840 201168 88000 116800 50200 100400 530440 1306168 -22440 411832