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 Manufacturing Inc Income Statement Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating loss $ 1,755,900 1,234,742 521,158 550,000 $(28,842) Hi-Tek produced and sold 60,400 units of B300 at a price of $21 per unit and 12,500 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 Direct labor Manufacturing overhead Cost of goods sold 400,900 $162,400 563,300 162,700 508,742 $1,234,742 120,300 42,400 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $50,000 and $107,000 of the company's advertising expenses could be directly traced to B300 and T500, respectively. The remainder of the seling and administrative expenses was organization-sustaining in nature. The ABC team also distributed the company's manufacturing overhead to four activities as shown below:

Explanation / Answer

1 Product margin under traditional system is B300 T500 Total A No. of units 60,400 12,500 72,900 B Sale price per unit 21 39 C=A*B Sale Value 1,268,400 487,500 1,755,900 D Direct Material 400,900 162,400 563,300 E Direct Labor 120,300 42,400 162,700 F=D+E Total Direct Costs 521,200 204,800 726,000 G Manufacturing Overhead 376,163 132,579 508,742 H =F+G Total Product Cost 897,363 337,379 1,234,742 I=C-H Product Margin 371,037 150,121 521,158 2 Product Margin under ABC system is B300 T500 Total A No. of units 60,400 12,500 72,900 B Sale price per unit 21 39 C=A*B Sale Value 1,268,400 487,500 1,755,900 D Direct Material 400,900 162,400 563,300 E Direct Labor 120,300 42,400 162,700 F=D+E Total Direct Costs 521,200 204,800 726,000 G Manufacturing Overhead (ABC) 252,890 352,052 604,942 H =F+G Total Product Cost 774,090 556,852 1,330,942 I=C-H Product Margin 494,310 -69,352 424,958 Activity Activity Cost Pool Cost driver B300 Calculation T500 Calculation Machining $206,092 Machine hours 121,940 91000/153800*206092 84,152 62800/153800*206092 Setups $141,450 Setup hours 30,750 75/345*141450 110,700 270/345*141450 Product Sustaining $100,400 No. of products 50,200 1/2*100400 50,200 1/2*100400 Advertising Cost $157,000 50,000 50000/157000*157000 107,000 107000/157000*157000 Total $604,942 $252,890 $352,052 3 Comparison of traditional and activity-based cost assignment is as follows: B300 T500 Total B300 T500 Total Amount % of total amount Amount % of total amount Amount Amount % of total amount Amount % of total amount Amount Traditional Cost system Activity Based Costing System Direct material 400,900 45% 162,400 48% 563,300 Direct Costs Direct labour 120,300 13% 42,400 13% 162,700    Direct material 400,900 52% 162,400 29% 563,300 Manufacturing overhead 376,163 42% 132,579 39% 508,742    Direct labour 120,300 16% 42,400 8% 162,700 Total cost assigned to products 897,363 337,379 1,234,742 Indirect Costs Selling and administrative 550,000 Machining 121,940 16% 84,152 15% 206,092 Total Cost   1,784,742 Setups 30,750 4% 110,700 20% 141,450 Product Sustaining 50,200 6% 50,200 9% 100,400 Advertising Cost 50,000 6% 107,000 19% 157,000 Total Cost assigned to products 774,090 100% 556,852 100% 1,330,942 Costs not assigned to products Other 60,800 Selling and administrative 393,000 Total Costs 1,784,742

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