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 70,000 units of B300 at a price of $20 per unit and 17,500 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 $50,000 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:

Activity

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

Hi Tek Manufacturing Inc. B300 T500 Total % of % of Amount Total Amount Amount Total Amount Amount Activity-Based Costing System Direct costs: Direct Materials            436,300 63.42%            251,700 36.58%         688,000 Direct Labor            200,000 65.79%            104,000 34.21%         304,000 Indirect costs: Manufacturing OH Machining Cost            126,000 59.02%              87,500 40.98%         213,500 Set Up Cost              31,500 20.00%            126,000 80.00%         157,500 Product Sustaining Cost              60,000 50.00%              60,000 50.00%         120,000 Advertising Overhead allocation              50,000 33.33%            100,000 66.67%         150,000 Total cost assigned to products            903,800            729,200     1,633,000 Costs not assigned to products:         517,000 Total cost     2,150,000

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