Question

Problem 7-16 Comparing Traditional and Activity-Based Product Margins [LO7-1, LO7-3, LO7-4, LO7-5) 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 1,230,193 Gross margin 467,207 Selling and administrative expenses 640,000 net operating loss $ (172,793) 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: T500 Total Direct materials $ 400,800 $ 162,700 $ 563,500 Direct labor $ 120,100 $ 42,700 162,800 Manufacturing over head 503,893 Cost of goods sold $ 1,230,193 3300 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $53,000 and $103,000 of the company's advertising expenses could be directly traced to 1300 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: Activity Cont Pool (and Activity Measure) Machining (machine-hours) Setups (setup hours) Product-sustaining number of products) Other (organization-sustaining costs) Total manufacturing overhead cost Manufacturing Overhead $ 199,513 142,680 101,600 60,100 $ 503,893 Activity 3300 T500 Total 90,200 62, 100 152,300 78 270 340 1 2 NA NA NA 1

Answer 1

Question Sheetv4 - Microsoft Excel х Cla Home Insert Page Layout Formulas Data Review View Developer QuickBooks (?) X H32 A B с D E F G H 1 K M N o P 2 3 1) 4 Calculation of product margin as per Traditional costing Total B300 T500 No. of Units Sold 60,300 12,600 5 Per Unit B300 60,300 T500 12,600 6 7 Sales: 1,206,000 491,400 20 39 9 10 11 Less: Cost of Goods Sold Direct material Direct labor manufacturing overhead 400,800 120,100 371,729 12 13 14 162,700 42,700 132,164 6.65 1.99 12.91 3.39 10.49 6.16 15 Product Margin 313,371 153,836 5.20 12.21 16 17 18 2) 19 20 Total B300 60,300 T500 12,600 Per Unit B300 T500 60,300 12,600 No. of Units Sold 21 Sales: 1,206,000 491,400 20 39 22 23 24 Less: Cost of Goods Sold Direct material Direct labor manufacturing overhead Less: Selling and Admin Exp 25 26 27 28 6.65 1.99 400,800 120,100 200,942 53,000 162,700 42.700 242,851 103,000 12.91 3.39 19.27 (See Note 1 Below) 8.17 3.33 0.88 29 30 Product Margin 431,158 (59,851) 7.15 (4.75) 31 32 33 KI Activate Windows Go to PC settings to activate Windows Sheet2025 Sheet2026 Sheet2027 Sheet2028 Sheet2029 Sheet2030 Sheet2031 Sheet2032 Sheet2033 Sheet2034 1 Ready BD 90% WA + x 12:01 PM 01/07/20

Question Sheetv4 - Microsoft Excel х Cla Home Insert Page Layout Formulas Data Review View Developer QuickBooks (?) X H61 foc A B с D E F H 1 K M N o P 32 33 Note 1: Overhead allocation sheet 34 35 T500 Total Cost Driver 36 Driver Incurred 37 Activity Machining Setup Product Sustaining 152300 B300 Driver OH Cost Incurred assigned 90200 118162 78 31980 1 50800 Total OH Cost 199,513 142,680 101,600 OH Rate 1.31 410.00 50800.00 OH Cost assigned 81351 110700 50800 38 62100 270 1 348 39 2 40 41 Total 443,793 200942 242851 42 Quantitative Comparison of the traditional and activity based assignment. 43 44 3) 45 46 Traditional costing system ABC costing system 47 T500 B300 Amount %age %age Amount %age 48 49 B300 Amount 400,800 120.100 371,729 45% Direct material Direct labor manufacturing overhead T500 Amount 162,700 42,700 132,164 %age 48% 13% 39% 50 13% 42% Direct cost: Direct material Direct labor 400,800 120,100 52% 15% 162,700 42,700 30% 8% 51 52 Total cost assigned to product 892,629 100% 337,564 100% 53 54 15% 55 56 Indirect Cost: Machining Setup Product Sustaining Less: Selling and Admin Exp Total cost assigned to product 118,162 31,980 50,800 53,000 774,842 4% 7% 81,351 110,700 50,800 103,000 551,251 15% 20% 9% 7% 19% 57 58 100% 100% 59 60 61 Activate Windows Go to PC settings to activate Windows 62 KI Sheet2025 Sheet2026 Sheet2027 Sheet2028 Sheet2029 Sheet2030 Sheet2031 Sheet2032 Sheet2033 Sheet2034 Ready B!! I 90% WA + x © 12:01 PM 01/07/20