Hi-Tek Manufacturing, Inc., makes two types of industrial component parts—the B3

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 produced and sold 60,200 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:

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $51,000 and $107,000 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:

Required: (SHOW ALL WORK)

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.

Hi-Tek Manufacturing Inc.
Income Statement Sales $ 1,699,300 Cost of goods sold 1,208,784 Gross margin 490,516 Selling and administrative expenses 590,000 Net operating loss $ (99,484 )

Explanation / Answer

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.

B300 T500 Total Sales 1204000 495300 1699300 Less Manufacturing cost Direct materials 4,00,300 1,62,300 5,62,600 Direct labor 1,20,300 42,200 1,62,500 Overhead Allocated 358075 125609 483684 Total manufacturing cost 8,78,675 3,30,109 12,08,784 Profit Margin 3,25,325 1,65,191 4,90,516

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