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 $ 1,701,200 1,237, 124 464,076 590,000 $ (125,924) Hi-Tek produced and sold 60,100 units of B300 at a price of $20 per unit and 12,800 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 $ 400,100 $ 120,500 T500 $ 162,500 $ 42,900 Direct materials Direct labor Manufacturing overhead Cost of goods sold Total $ 562,600 163,400 511,124 $ 1,237,124 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $51,000 and $104,000 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 $ 201,564 148,260 100,600 60,700 $ 511,124 Activity B300 T500 90,200 62,500 280 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 152,700 353 1 NA NA 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 L Product Margin 304235 2 Product Margin under Activity Based costing B300 L Product Margin 430376 T500 Total 159523463758 T500 -60600 Total 369776

3. Quantitative Comparision of the Traditional and Activity Based Cost Assignments Quantitative comparsion of the Traditional Cost B300 1 T500 Total % 26.3% 562600 1634001 511442 1237442 590000 1827442 Total Traditional Costing System Amount % Amount Direct Material 400100 71.1% 162500 28.9% DirectLabor 12050073.7% 429001 26.3% Manufacturing Overheads 377165 73.7% 134277 Total Cost Assigned to Products 897765 339677 Selling and Administrative Expenses Total Cost Quantitative Comparison of Acticity Based Cost Assignments B300 T500 Activty Based Costing System Amount % Amount % Direct Cost Direct Material 400100 71.1% 162500 28.9% Direct Labor 1205001 73.7% 42900 26.3% Advertisements (Traced) 51000 32.9% 1040001 67.1% Indirect Cost Machining 119064 59.1% 82500 40.9% Batch setup 30660 20.7% 117600 79.3% Prodcut Sustainind 50300 50.0% 50300 50.0% Total Cost Assigned to Products | 771624 559800 Cost Not asigned to the Products Selling and Administrative Expenses Others Total Cost 562600 163400 155000 201564 148260 100600 1331424 435000 60700 1766424

Working Notes Total B300 L 20 400100 120500 60100 T500 39 162500 42900 12800 562600 163400 72900 511124 Selling Price Direct Material Direct Labor Production in Units Manufacturing Overheads Advertisements (Traced) Selling and Administrative Expenses Maufacturing OH Estimated Labor Dollars Predetermined Overhead Rate 51000 104000 590000 511124 163400 3.13 511124/163400 MOH Activity B300 T500 Total 902001 62500 152700 280 353 Machining Setups Prodcut sustaining Others 201564 148260 100600 60700 511124 Traditional Costing System B300 l sales 1202000 Direct Material 400100 Direct Labor 120500 Manufacturing Overheads (Rate *labour) 377165 Total Manufacturing Cost 897765 Product Margin 304235 T500 Total 499200 1701200 162500 562600 42900 163400 134277 511442 339677 1237442 159523 463758

Determination of Activity Rate Activty Pool Machining Batch setup Prodcut Sustaining Activity Based Costing System Estimated OH 201564 148260 100600 Base Activity Rate 152700 1.32 353 420.00 50300 2 sales Direct Material Direct Labor Advertisements (Traced) Matching Activity *Rate) Batch Setup (Activity *Rate) Prodcut Sustaining Total Cost Product Margin B300 1202000 400100 120500 51000 119064 30660 50300 771624 430376 T500 Total 499200 1701200 1625000 5626001 429001 163400 104000 155000 825001 201564 1176001 148260 503001 100600 559800 1331424 -60600 369776