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 below: S HI-Tek Manufacturing Inc. Income Statement Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating loss 1,718,000 1.223,632 494,368 590,000 195,632) 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: B30D $ 400.000 S 120,700 T500 $ 162,500 $ 42.900 Direct materials Direct labor Manufacturing overhead Cost of goods sold Total $ 562,600 163,600 497.432 $ 1,223,632 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that S58.000 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 $ 207,672 129,560 100,000 60.200 $ 497.432 B300 90,600 78 Activity T 500 62,100 240 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 152,700 316 NA NA NA Required 1. Compute the product margins for the B300 and T500 under the company's traditional costing system. (Do not round your overhead rate. Round your other intermediate and final answers to the nearest whole number.) B300 T 50D Total Product margin

Answer 1

Solution 1:

Predetermined overhead rate = 497432/163600 = $3.04 per direct labor dollar

Computation of Product Margin - Traditional Costing System
Particulars	B300	T500	Total
Sales (B300 - 60,500*$20, T500 - 12700*$40)	$12,10,000	$5,08,000	$17,18,000
Direct material	$4,00,000	$1,62,600	$5,62,600
Direct labor	$1,20,700	$42,900	$1,63,600
Manufacturing overhead ($3.04 * Direct labor)	$3,66,928	$1,30,416	$4,97,344
Product Margin	$3,22,372	$1,72,084	$4,94,456

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	$2,07,672.00	Machine hours	152700	$1.36	90600	$1,23,216.00	62100	$84,456.00
Setups	$1,29,560.00	Setup hours	316	$410.00	76	$31,160.00	240	$98,400.00
Product sustaining	$1,00,000.00	Number of products	2	$50,000.00	1	$50,000.00	1	$50,000.00
Other	$60,200.00	No allocation
Total	$4,97,432.00					$2,04,376.00		$2,32,856.00

Computation of Product Margin - Activity based Costing System
Particulars	B300	T500	Total
Sales (B300 - 60,500*$20, T500 - 12700*$40)	$12,10,000	$5,08,000	$17,18,000
Direct material	$4,00,000	$1,62,600	$5,62,600
Direct labor	$1,20,700	$42,900	$1,63,600
Allocated Manufacturing overhead	$2,04,376	$2,32,856	$4,37,232
Advertising Expense	$58,000	$1,05,000	$1,63,000
Product Margin	$4,26,924	-$35,356	$3,91,568

Solution c:

Quantity comparison of traditional cost assignment
Particulars	B300		T500		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Material Cost	$4,00,000	71.1%	$1,62,600	28.9%	$5,62,600
Direct Labor Cost	$1,20,700	73.8%	$42,900	26.2%	$1,63,600
Manufacturing Overhead cost	$3,66,928	73.8%	$1,30,416	26.2%	$4,97,344
Total cost assigned to products	$8,87,628		$3,35,916		$12,23,544
Total cost not assigned to product:
Selling and adminstrative Expenses					$5,90,000
Total Cost					$18,13,544
Quantity comparison of Activity Based cost assignment
Particulars	B300		T500		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Cost:
Material Cost	$4,00,000	71.1%	$1,62,600	28.9%	$5,62,600
Labor Cost	$1,20,700	73.8%	$42,900	26.2%	$1,63,600
Advertising Expense	$58,000	35.6%	$1,05,000	64.4%	$1,63,000
Indirect Cost:
Machining	$1,23,216	59.3%	$84,456	40.7%	$2,07,672
Setups	$31,160	24.1%	$98,400	75.9%	$1,29,560
Product sustaining	$50,000	50.0%	$50,000	50.0%	$1,00,000
Total Cost Assigned to Products	$7,83,076		$5,43,356		$13,26,432
Cost not assigned to products:
Manufacturing					$60,200
Selling and administrative (590000- 58000-105000)					$4,27,000
Total Cost					$18,13,632