Question

PROBLEM 7-17 Comparing Traditional and Activity-Based PRODUCE MOTS VALVULNU 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: Hi-Tek Manufacturing Inc. Income Statement Sales ....... Cost of goods sold ......... Gross margin .. Selling and administrative expenses Net operating loss... $2,100,000 1,600,000 500,000 550,000 $ (50,000) Hi-Tek produced and sold 70.00 af a price of $40 per unit. oduced and sold 70,000 units of B300 at a price of $20 per unit and 17,500 units of TSCO of$40 per unit. The company's traditional cost system allocates manufacturing overhead s using a plantwide overhead rate and direct labor dollars as the allocation base. Addi- information relating to the company's two product lines is shown below: Activity Cost Pool (and Activity Measure) Manufacturing Overhead B300 T500 Tot 62,500 8300T500 Total 90,000 75 152,500 375 300 Machining (machine-hours) .............. Setups (setup hours) ................... Product-sustaining (number of products) Other (organization-sustaining costs) ...... Total manufacturing overhead cost ........ $436,300 $251,700 $200,000 $104,000 $213,500 157,500 120,000 117,000 $608,000 Direct materials Direct labor ... Manufacturing overhead .... Cost of goods sold ΝΑ. NA $ 688,000 304,000 608,000 $1,600,000 Required: 1. Using Exhibit 7-13 as Exhibit 7-13 as a guide, compute the product margins for the B300 and T500 under the The company has created an activity-based costing system to evaluate the profitability of its prod. ucts. 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 1500, 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: company's traditional costing system. 2. Using Exhibit 7-11 as a guide activity-based costing system. oit 7-11 as a guide, compute the product margins for B300 and 1500 under the cost assignments. Explam -14 as a guide, prepare a quantitative comparison of the traditional and activity-based ents. Explain why the traditional and activity-based cost assignments differ.

Answer 1

solution: 1) product margin under traditional system sales B300 1,400,000 T500 700,000 Total 2,100,000 436,300 200,000 251,700 104,000 688,000 304,000 Direct materials Direct labor Manufacturing overhead applied (direct labor cost*2)** total manufacturing cost 400,000 208,000 608,000 1,036,300 563,700 1,600,000 Product margin 363,700 136,300 500,000 2.00000 **overhead rate 600000/304000 | 2) product margin under ABC sales B300 1,400,000 T500 700,000 Total 2,100,000 *working Machining * Setups Product-sustaining B300 1500 90000*1.4 $2500*1.4 75*420 300*420 60000*1 60000*1 Direct materials Direct labor advertising exp - Machining * Setups * Product-sustaining * total manufacturing cost 436,300 200,000 50,000 126,000 31,500 60,000 903,800 251,700 104,000 100,000 87,500 126,000 60,000 729,200 688,000 304,000 150,000 213,500 157,500 120,000 1,633,000 activity rate Calculation of activity rate Manufacturing Activity Activity Cost Pool (and Activity Measure) Overhead Total Machining (machine-hours) 213500 152500 Setups (setup hours) 157500 375 Product-sustaining (number of products) 120000 2 1.40 420 60,000 Product margin 496,200 - 29,200 467,000 Sheet768 Sheet 769 Sheet770 Sheet771 Sheet772 Sheet773 Sheet774 Sheet775 Sheet776 ] ENG US TO 14:40 27/02/2020

3) comparision B300 T500 amount amount | Traditional cost system Direct materials Direct labor Manufacturing overhead applied total cost assigned to product selling and administrative exp total cost 436,300 200,000 400,000 1,036,300 % of total amount 63.4% 65.8% 65.8% 251,700 104,000 208,000 563,700 Total % of total amount 36.6% 688,000 34.2% 304,000 34.2% 608,000 1,600,000 550,000 | 2,150,000 B300 T500 Total amount % of total amount amount % of total amount 436,300 200,000 50,000 63.4% 65.8% 33.3% 251,700 104,000 100,000 36.6% 34.2% 66.7% 688,000 304,000 150,000 Activity based costing direct cost Direct materials Direct labor advertising expense Indirect cost Machining * Setups * Product-sustaining * total cost assigned to product cost not assigned to product selling and administrative exp (550000-150000) Other (organization-sustaining costs) total cost 126,000 31,500 60,000 903,800 59.0% 20.0% 50.0% 87,500 126,000 60,000 729,200 41.0% 80.0% 50.0% 213,500 157,500 120,000 1,633,000 400,000 117,000 2,150,000