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: HL-Tek Manufacturing Inc. Income Statement Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating loss $ 1,639,000 1,227,000 412,690 57e,eee (158,000) Hi-Tek produced and sold 60,400 units of B300 at a price of $19 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, 400 $ 162,700 $ 563,100 Direct labor $ 120,100 $ 42,300 162,400 Manufacturing overhead 501,500 Cost of goods sold $ 1,227,000 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $56,000 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: 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 Manufacturing Overhead $ 209,610 130,790 100,600 60,500 $501,500 Activity 3300 T500 Total 90,600 62,400 153,000 79 240 319 1 1 2 NA NA NA Required: 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. Complete this question by entering your answers in the tabs below.

Answer 1

1 Traditional costing system Profit Margin Estimated Volume-Units Sales ($19;$39) Direct material Direct Labour Overhead Total product cost Profit Margin B300 60,400 $1,147,600 $ $ 400,400 $ $ 120,100 $ $ 370,875 $ $ 891,375$ $ 256,225$ T500 Total 12,600 491,400 $ 1,639,000 162,700 $ 563,100 42,300 $ 162,400 130,625 $ 501,500 335,625 $ 1,227,000 155,775 $ 412,000 Plantwide overhead rate = Total estimated overhead cost/Estimated total direct labor dollars B300 - OH = $501,500 * (120,100/162,400) = $370,875 T500 - OH = $501,500 * (42,300/162,400) = $130,625

2 Activity Based costing system Profit Margin Estimated Volume-Units Sales ($19;539) Direct material Direct Labour Advertising expenses Overhead (w.n) Total product cost Profit Margin B300 60,400 $ 1,147,600 $ $ 400,400 $ $ 120,100 $ $ 56,000 $ $ 206,812$ $ 783,312 $ $ 364,288$ T500 Total 12,600 491,400 $ 1,639,000 162,700$ 563,100 42,300 $ 162,400 105,000 $ 161,000 234,188$ 441,000 544,188 $ 1,327,500 -52,788 $ 311,500 Notes: Based On Activity Based costing Overhead cost pool Machining Setups Product-sustaining Other Total OH Cost OH COST Cost drivers $ 209,610 Machine hours $ 130,790 Setup hours $ 100,600 No.of products $ 60,500 Org.sustaining cost $ 501,500 Activity level Allocation Rate 153,000 $ 1.37 319 $ 410.00 2 $ 50,300.00 0 Overhead cost pool B300 T500 Total Machining 90,600 62,400 153,000 Setups 79 240 319 Product sustaining 1 1 2 Other *Other activity cost is not shown in ABC. It should not be assigned to products. B300 T500 Total Product cost as per ABC MOH- Machining Setups Product sustaining Other Total OH Cost $ $ $ $ $ 124,122 $ 32,390$ 50,300 $ $ 206,812 $ 85,488 $ 98,400 $ 50,300 $ $ 234,188 $ 209,610 130,790 100,600 441,000

3 B300 T500 Total % of % of Amount Amount Amount Traditional cost system: Direct Material Direct Labor Manufacturing Overhead Total cost assigned to products Selling&Admin expenses Total cost $ $ $ 400,400 120,100 370,875 891,375 71.11% $ 73.95% $ 73.95% $ $ 162,700 42,300 130,625 335,625 28.89% $ 563,100 26.05% $ 162,400 26.05% $ 501,500 $ 1,227,000 $ 570,000 $ 1,797,000 $ B300 T500 Total % of % of Amount Amount Amount 400,400 $ $ $ 120,100 56,000 71.11% $ 73.95% $ 34.78% $ 162,700 42,300 105,000 28.89% $ 26.05% $ 65.22% $ 563,100 162,400 161,000 Activity based costing: Direct costs: Direct Material Direct Labor Advertising expenses Indirect costs: Machining Setups Product sustaining Total cost assigned to products Costs not assigned to products: Selling&Admin expenses Others Total cost $ $ $ $ 124,122 32,390 50,300 783,312 59.22% $ 24.76% $ 50.00% $ $ 85,488 98,400 50,300 544,188 40.78% $ 209,610 75.24% $ 130,790 50.00% $ 100,600 $ 1,327,500 $ 570,000 $ 60,500 $ 1,958,000

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