Hi-Tek Manufacturing Inc. makes two types of industrial component parts—the B300
ID: 2519977 • 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 below:
Hi-Tek produced and sold 60,200 units of B300 at a price of $20 per unit and 12,700 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:
The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $52,000 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:
Income Statement Sales $ 1,699,300 Cost of goods sold 1,224,048 Gross margin 475,252 Selling and administrative expenses 630,000 Net operating loss $ (154,748) 1. Compute the product margins for the B300 and T500 under the company's traditional costing system. (Do not round your overhead rate. Round your other intermediate and final answers to the nearest whole number. ? 300 T500 Total Product margin 2. Compute the product margins tor B300 and T500 under the activity-based costing system. (Negative product margins should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places.) B300 T500 Total Product margin 3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Do not round your overhead rate. Round your other intermediate calculations and final answers to the nearest whole number. Round your "Percentage" answer to 1 decimal place. (i.e. -1234 should be entered as 12.3)) B300 T500 Total %of %of Amount Total Amoun Amount Total Amount Traditional Cost Systemm Total cost assigned to products Total cost
Explanation / Answer
1.Product margin under traditional costing method : Particulars B300 T500 Total Sales $1,204,000 $495,300 $1,699,300 Less: Direct Material $400,300 $162,500 $562,800 Direct Labour $120,900 $42,200 $163,100 Manufacturing Overhead ($498148/163100)*120900,42200 $369,259 $128,889 $498,148 Total cost of goods sold $890,459 $333,589 $1,224,048 Product Margin (Sales –COGS) $313,541 $161,711 $475,252 2.Product margin under Activity based costing system: Particulars B300 T500 Total Sales $1,204,000 $495,300 $1,699,300 Less: Direct Cost Direct Material $400,300 $162,500 $562,800 Direct Labour $120,900 $42,200 $163,100 Advertising expense $52,000 $106,000 $158,000 Indirect costs Machining(902:621) $122,672 $84,456 $207,128 setups (73:220) $32,120 $96,800 $128,920 Product sustaining (1:1) $50,800 $50,800 $101,600 Total cost assigned to product $778,792 $542,756 $1,321,548 Product Margin (Sales –COGS) $425,208 -$47,456 $377,752 3.Quantitative comparison under traditional costing method : Particulars B300 % T500 % Total Less: Direct Material $400,300 71% $162,500 29% $562,800 Direct Labour $120,900 74% $42,200 26% $163,100 Manufacturing Overhead @ $369,259 74% $128,889 26% $498,148 Total cost of goods sold(assigned to product) $890,459 73% $333,589 27% $1,224,048 Selling & administration cost $630,000 Total Cost $1,854,048 4.Quantitative comparison under Activity based costing system: Particulars B300 % T500 % Total Direct Cost Direct Material $400,300 71% $162,500 29% $562,800 Direct Labour $120,900 74% $42,200 26% $163,100 Advertising expense 52,000 33% 106,000 67% 158,000 Indirect costs Machining(902:621) 122,672 59% 84,456 41% 207,128 setups (73:220) 32,120 25% 96,800 75% 128,920 Product sustaining (1:1) 50,800 50% 50,800 50% 101,600 Total cost assigned to product 778,792 59% 542,756 41% 1,321,548 Cost not assigned to the product Selling & administration cost 630,000 Other 60500 Total Cost 2,012,048
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