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 | $ | 1,703,300 | |
| Cost of goods sold | 1,257,146 | ||
| Gross margin | 446,154 | ||
| Selling and administrative expenses | 570,000 | ||
| Net operating loss | $ | (123,846 | ) |
Hi-Tek produced and sold 60,400 units of B300 at a price of $20 per unit and 12,700 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 | $ | 400,000 | $ | 162,300 | $ | 562,300 |
| Direct labor | $ | 120,300 | $ | 43,000 | 163,300 | |
| Manufacturing overhead | 531,546 | |||||
| Cost of goods sold | $ | 1,257,146 | ||||
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:
| Manufacturing Overhead |
Activity | |||||
| Activity Cost Pool (and Activity Measure) | B300 | T500 | Total | |||
| Machining (machine-hours) | $ | 201,696 | 90,700 | 62,100 | 152,800 | |
| Setups (setup hours) | 168,750 | 75 | 300 | 375 | ||
| Product-sustaining (number of products) | 100,200 | 1 | 1 | 2 | ||
| Other (organization-sustaining costs) | 60,900 | NA | NA | NA | ||
| Total manufacturing overhead cost | $ | 531,546 | ||||
1. Compute the product margins for the B300 and T500 under the company’s traditional costing system.
Solution 1:
Predetermined overhead rate = Estimated overhead / Estimated direct labor cost
= $531,546 / $163,300 = $3.25503 per direct labor dollar
| Computation of Product Margin - Traditional Costing System | |||
| Particulars | B300 | T500 | Total |
| Sales (B300 - 60,400*$20, T500 - 12700*$39) | $1,208,000 | $495,300 | $1,703,300 |
| Direct material | $400,000 | $162,300 | $562,300 |
| Direct labor | $120,300 | $43,000 | $163,300 |
| Manufacturing overhead (Direct labor * $3.25503) | $391,580 | $139,966 | $531,546 |
| Product Margin | $296,120 | $150,034 | $446,154 |
Hi-Tek Manufacturing, Inc., makes two types of industrial component parts—the B300 and the T500. An absorption costing i...
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 $ 1,703,300 Cost of goods sold 1,257,146 Gross margin 446,154 Selling and administrative expenses 570,000 Net operating loss $ (123,846 ) Hi-Tek produced and sold 60,400 units of B300 at a price of $20 per unit and 12,700 units of T500 at a price of $39 per unit....
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 $ 1,703,300 Cost of goods sold 1,257,146 Gross margin 446,154 Selling and administrative expenses 570,000 Net operating loss $ (123,846 ) Hi-Tek produced and sold 60,400 units of B300 at a price of $20 per unit and 12,700 units of T500 at a price of $39 per unit....
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