Hi-Tek Manufacturing, Inc., makes two types of industrial component parts—the B3
ID: 2511660 • Letter: H
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 $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 $58,000 and $105,000 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 $ 1,651,600 Cost of goods sold 1,257,459 Gross margin 394,141 Selling and administrative expenses 550,000 Net operating loss $ (155,859 )
Explanation / Answer
Solution:
Part 1 – Product Margin under traditional costing
Product Margin is the difference between selling price and product cost.
Product cost is the cost of making the product.
Under traditional costing, product cost is the sum of direct materials, direct labor, variable manufacturing overhead and fixed manufacturing overhead.
In this costing system, overheads are allocated on the basis of predetermined overhead rate by taking actual activity level achieved by the company.
So, first of all we need to calculate the Predetermined Overhead Rate.
Allocation base is direct labor dollars.
Predetermined overhead rate = total estimated manufacturing $531,159 / Direct labor dollars $163,700
Assigned Manufacturing Overhead Cost to Product B300 = Direct labor dollar 120,900 x 531,159 / 163,700
= $392,285
Assigned Manufacturing Overhead Cost to Product T500 = Direct labor dollar 42,800 x 531,159 / 163,700
= $138,874
Calculation of Product Margin under traditional costing system
B300
T500
Units Sold
60,400
12,600
Unit Selling Price
$19
$40
Sales Value (Unit Sold x Unit Selling Price)
$1,147,600
$504,000
Product Cost
Direct Material Cost
$400,400
$162,200
Direct labor
$120,900
$42,800
Applied Manufacturing Overhead (Refer Above working)
$392,285
$138,874
Total Product Cost
$913,585
$343,874
Product Margin (Sales Value - Product Cost)
$234,015
$160,126
/ Units Sold
60400
12600
Unit Product Margin
$3.87
$12.71
Part 2 – Product Margin Under ABC System
Activity Based Costing System
- ABC is a costing method which identifies the activities in the organization and assigns the cost of each activity with resources to all the products or services according to the actual consumption of activity by the product or service.
- This system determines all the activities related to product or production process.
- This system calculates the cost of those activities which are related to product or production process and thereafter determine the cost of the product.
- In ABC costing the overhead costs are distributed to the product on the basis of benefit received from indirect activity.
- It helps to distribution of overheads on the basis of activities.
The Activity based overhead rate = Estimated Overheads related to the activity / Total Cost Driver per activity)
First we need to calculate the overhead rate and then assigned the overhead cost by using actual activity usage by each product and overhead rate as follows:
B300
T500
Activity Cost Pool
Expected Overhead Costs (A)
Total Expected Activity (B)
Overhead Rate per Unit of Activity (C = A/B)
Activity Driver USAGE (H)
Overhead Assigned (C*H)
Activity Driver USAGE (E)
Overhead Assigned (C*E)
Machining
$202,559
152300
Machine Hours
$1.33
per MH
90200
$119,966
62100
$82,593
Setups
$168,300
374
Setup hours
$450.00
per setup hour
74
$33,300
300
$135,000
Product Sustaining
$100,200
2
Products
$50,100.00
per product
1
$50,100
1
$50,100
Other
$60,100
0
$0
$0
Total Overhead Assigned (O)
$531,159
$203,366
$267,693
Product Margin
B300
T500
Units Sold
60,400
12,600
Unit Selling Price
$19
$40
Sales Value (Unit Sold x Unit Selling Price)
$1,147,600
$504,000
Product Cost
Direct Material Cost
$400,400
$162,200
Direct labor
$120,900
$42,800
Applied Manufacturing Overhead (Refer Above working)
$203,366
$267,693
Total Product Cost
$724,666
$472,693
Product Margin (Sales Value - Product Cost)
$422,934
$31,307
/ Units Sold
60400
12600
Unit Product Margin
$7.00
$2.48
Part 3 – Quantitative Comparison
Applied manufacturing Overhead
B300
T500
As per Traditional Costing
$392,285
$138,874
As per Activity Based Costing
$203,366
$267,693
As per traditional costing the overheads are allocated on predetermined basis and using allocation base. Allocation base may be direct labor hours, machine hours, direct labor dollars as specified and decided the management.
As per ABC System, the overheads are categorized on the basis of activity and number of activity involved in making the product.
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
B300
T500
Units Sold
60,400
12,600
Unit Selling Price
$19
$40
Sales Value (Unit Sold x Unit Selling Price)
$1,147,600
$504,000
Product Cost
Direct Material Cost
$400,400
$162,200
Direct labor
$120,900
$42,800
Applied Manufacturing Overhead (Refer Above working)
$392,285
$138,874
Total Product Cost
$913,585
$343,874
Product Margin (Sales Value - Product Cost)
$234,015
$160,126
/ Units Sold
60400
12600
Unit Product Margin
$3.87
$12.71
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