Hi-Tek Manufacturing, Inc., makes two types of industrial component parts—the B3
ID: 2535012 • 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 60,300 units of B300 at a price of $19 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 $54,000 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 $ 1,641,000 Cost of goods sold 1,245,234 Gross margin 395,766 Selling and administrative expenses 610,000 Net operating loss $ (214,234 )
Explanation / Answer
Cost allocation and margins based on traditional costing:
B300
T500
Total
Direct materials
$
4,00,600
$
1,62,500
$
5,63,100
Direct labor
$
1,20,000
$
43,000
$
1,63,000
Manufacturing overhead
382185
$
1,36,949
$
5,19,134
Cost of goods sold
9,02,785
3,42,449
$
12,45,234
Sales
11,45,700
4,95,300
16,41,000
Gross Margins
2,42,915
1,52,851
3,95,766
Cost allocation and margins based on Activity based costing:
Manufacturing
Activity
Allocation
Activity Cost Pool (and Activity Measure)
Overhead
B300
T500
Total
B300
T500
Total
Machining (machine-hours)
$
2,07,264
90,200
62,200
1,52,400
1,22,672
84,592
2,07,264
Setups (setup hours)
1,50,070
79
270
349
33,970
1,16,100
1,50,070
Product-sustaining (number of products)
1,01,000
1
1
2
50,500
50,500
1,01,000
Other (organization-sustaining costs)
Allocated based on Labour cost
60,800
1,20,000
43,000
1,63,000
44,761
16,039
60,800
Total manufacturing overhead cost
$
5,19,134
2,51,903
2,67,231
5,19,134
Direct materials
4,00,600
1,62,500
8,31,004
Direct labor
1,20,000
43,000
1,63,000
Cost of goods sold
7,72,503
4,72,731
12,45,234
Sales
11,45,700
4,95,300
16,41,000
Gross Margins
3,73,197
22,569
3,95,766
B300
T500
Total
Direct materials
$
4,00,600
$
1,62,500
$
5,63,100
Direct labor
$
1,20,000
$
43,000
$
1,63,000
Manufacturing overhead
382185
$
1,36,949
$
5,19,134
Cost of goods sold
9,02,785
3,42,449
$
12,45,234
Sales
11,45,700
4,95,300
16,41,000
Gross Margins
2,42,915
1,52,851
3,95,766
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