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 60,400 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:

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $57,000 and $100,000 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 $ 1,772,400 Cost of goods sold 1,252,199 Gross margin 520,201 Selling and administrative expenses 590,000 Net operating loss $ (69,799 )

Explanation / Answer

Solution 1:

Solution 2:

Solution 3:

Overhead Allocation - Traditional Costing System Particulars B300 T500 Total Estimated annual Production (In units) 60400 12600 Direct Labor Cost $120,800 $42,600 $163,400 Overhead Cost Allocation basis direct labour dollar (Overhead / Total direct labor dollar * Labor dollar of model) $388,348 $136,951 $525,299 Manufacturing overhead cost per unit (Allocated Overhead / Nos of units) $6.43 $10.87

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