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 Cost of goods sold Gross margin Selling and administrative expenses Net operating loss $ 1,772,400 1, 248,128 524,272 610,000 $ (85,728) Hi-Tek produced and sold 60,400 units of B300 at a price of $21 per unit and 12,600 units of T500 at a price of $40 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 $ 400,900 $ 120,700 T500 $ 162,800 $ 42,100 Direct materials Direct labor Manufacturing overhead Cost of goods sold Total $ 563,700 162,800 521,628 $ 1,248,128 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $58,000 and $102,000 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:

Answer 1

Answers 1 Product Margin under Traditional Costing IB300 Product Margin 360560 2 Product Margin under Activity Based costing B300 Product Margin 489272 T500 164380 Total 524940 Total T500 -64500 424772

3. Quantitative Comparison of the Traditional and Activity Based Cost Assignments Quantitative comparsion of the Traditional Cost B300 T500 Total Traditional Costing System Direct Material DirectLabor Manufacturing Overheads Total Cost Assigned to Products Selling and Administrative Expenses Total Cost Amount 400900 120700 386240 907840 %6 71.196 74.1961 74.19 Amount 162800 42100 1347201 3396201 28.996 25.9961 25.996 563700 162800 520960 12474601 6100001 1857460 Quantitative Comparison of Acticity Based Cost Assignments B300 T500 Total Total Activty Based Costing System Amount % Amount % Direct Cost Direct Material 400900 71.1% 162800 28.996 5637001 Direct Labor 120700 74.1% 42100 25.99 1628001 Advertisements (Traced) 58000 36.396 102000 63.896160000 Indirect Cost Machining 1193281 59.19 8 2500 40.99 201828 Batch setup 30100118.996 129000 81.196159100 Prodcut Sustainind 50100 50.096 50100 50.096 100200 Total Cost Assigned to Products 779128 568500 13476281 Cost Not asigned to the Products Selling and Administrative Expenses 450000 Others 60500 Total Cost 11797628

21 Working Notes B300 1500 Total Selling Price 401 Direct Material 400900 162800) 563700 Direct Labor 1207001 421001 1628001 Production in Units 60400) 12600 730001 Manufacturing Overheads 521628 Advertisements (Traced) 58000 102000 Selling and Administrative Expenses 610000 Maufacturing OH 5 21628 Estimated Labor Dollars 162800 Predetermined Overhead Rate 3.20 521628/162800 MOH Activity B300 T500 Total Machining 201828 90400 62500 152900 Setups 159100 70 300 370 Prodcut sustaining 100200 Others 60500 521628 Traditional Costing System B300 1500 T otal sales 1268400 5 040001772400 Direct Material 400900 1 62800 563700 Direct Labor 120700 42100 162800 Manufacturing Overheads 386240 134720 520960 Total Manufacturing Cost 9078401 3396201 1247460 Product Margin 360560 164380 524940

Determination of Activity Rate Activty Pool Machining Batch setup Prodcut Sustaining Estimated OH 201828 159100 100200 Base 152900 370 Activity Rate 1.32 430.00 50100 Activity Based Costing System sales Direct Material Direct Labor Advertisements (Traced) Matching (Activity Rate) Batch Setup (Activity Rate) Prodcut Sustaining Total Cost Product Margin B300 1268400 400900 120700 580001 119328 30100 501001 779128 489272 T500 Total 504000 1772400 162800 563700 42100 162800 102000 160000 201828 129000 159100 501001 100200 568500 1347628 -64500 4 24772