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 $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:

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:

Required:

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 $ 1,635,200 Cost of goods sold 1,231,951 Gross margin 403,249 Selling and administrative expenses 610,000 Net operating loss $ (206,751 )

Explanation / Answer

1.

Working:

2.

Working:

3.

B300 T500 Total Sales 1143800 491400 1635200 Cost of goods sold:    Direct material 400200 162900 563100    Direct labor 120500 42400 162900    Manufacturing overhead 374261 131690 505951 Total cost of goods sold 894961 336990 1231951 Product margins 248839 154410 403249

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