Hi-Tek Manufacturing Inc. makes two types of industrial component parts—the B300

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 below:

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 $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 $106,000 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:

Activity

Compute the product margins for the B300 and T500 under the company’s traditional costing system

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 below:

Explanation / Answer

Overhead rate = 493150/163000=3.0255 or 302.55% of DIrect labor cost

B300 T500 Sales 1143800       [60200*19] 504000     [12600*40] Less: Direct material 400400 162700 Direct labor 120900 42100 overhead 365782.95     [120900*302.55%] 127373.55     [42100*302.55%] selling and administration 57000 106000 Product margin 199,717.05 65826.45

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