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 $ 1,697,400 Cost of goods sold 1,244,362 Gross margin 453,038 Selling and administrative expenses 550,000 Net operating loss $ (96,962 ) Hi-Tek produced and sold 60,300 units of B300 at a price of $20 per unit and 12,600 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 $ 400,900 $ 162,200 $ 563,100 Direct labor $ 120,500 $ 42,300 162,800 Manufacturing overhead 518,462 Cost of goods sold $ 1,244,362 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $52,000 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) $ 211,692 90,700 62,700 153,400 Setups (setup hours) 145,770 79 260 339 Product-sustaining (number of products) 100,800 1 1 2 Other (organization-sustaining costs) 60,200 NA NA NA Total manufacturing overhead cost $ 518,462 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 301410 2 Product Margin under Activity Based costing B300 L Product Margin 423064 T500 152386 Total 453796 T500 -66826 Total 356238

3. Quantitative Comparision of the Traditional and Activity Based Cost Assignments Quantitative comparsion of the Traditional Cost B300 T500 Total 563100 162800| 517704 1243604 550000 1793604 Total Traditional Costing System Amount % Amount % Direct Material 400900 71.2% 162200 28.8% DirectLabor 120500 74.0% 42300 26.0% Manufacturing Overheads 383190 74.0% 134514 26.0% Total Cost Assigned to Products 904590 339014 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 400900 71.2% 162200 28.8% Direct Labor 120500 74.0% 42300 26.0% Advertisements (Traced) 52000 33.1% 105000 66.9% Indirect Cost Machining 125166 59.1% 86526 40.9% Batch setup 33970 23.3% 111800 76.7% Prodcut Sustainind 50400 50.0% 50400 50.0% Total Cost Assigned to Products 782936 558226 Cost Not asigned to the Products Selling and Administrative Expenses Others Total Cost 563100 162800 157000 211692 145770 100800 1341162 393000 60200 1734162

201 391 Working Notes B300 T500 Total Selling Price Direct Material 400900 1 62200 5 63100 Direct Labor 120500 42300 162800 Production in Units 60300 12600 729001 Manufacturing Overheads 518462 Advertisements (Traced) 52000 105000 Selling and Administrative Expenses 550000 Maufacturing OH 518462 Estimated Labor Dollars 162800 | Predetermined Overhead Rate 3.18 518462/162800 MOH D Activity B300 T500 Total Machining 211692 9 0700 62700 153400 Setups 145770 79 260 339 Prodcut sustaining 100800 Others 602001 518462 Traditional Costing System B300 T500 Total sales 1206000 4914001 16974001 Direct Material 400900 1 62200 5 63100 Direct Labor 120500 4 2300162800 Manufacturing Overheads (Rate *labour) 383190 134514 5 17704 Total Manufacturing Cost 904590 339014 1243604 Product Margin 301410 1 52386 453796

Base 153400 Determination of Activity Rate Activty Pool Machining Batch setup Prodcut Sustaining Activity Based Costing System Estimated OH 211692 145770 100800 Activity Rate 1.38 430.00 50400.00 339 2 sales Direct Material Direct Labor Advertisements (Traced) Matching (Activity Rate) Batch Setup (Activity Rate) Prodcut Sustaining Total Cost Product Margin B300 1206000| 400900 120500 52000 125166 33970 50400 782936 423064 T500 Total 491400 1697400 162200 5 63100 4 2300 1 62800 105000 157000 86526 211692 111800 145770 504001 100800 5582261341162 -66826356238