Hi-Tek Manufacturing, Inc., makes two types of industrial component parts the B3

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 Manufacturing Inc. Income Statement Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating loss $ 1,712,000 1,233,833 478,167 650,000 $ (171,833) 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 $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: B300 T500 Total Direct materials Direct labor Manufacturing overhead Cost of goods sold $ 400,600 162,000 562,600 162,600 508,633 $ 1,233,833 $ 120,100 42,500 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $59,000 and $104,000 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 Manufacturing Activity Cost Pool (and Activity Measure) Machining (machine-hours) Setups (setup hours) Product-sustaining (number of products) Other (organization-sustaining costs) Total manufacturing overhead cost B300 T500 Total $ 212,253 135,880 100,200 60,300 508,633 90,100 62,600 52,700 316 2 NA 240 NA 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

Explanation / Answer

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Traditional Costing Amounts in $'s Products Per unit B300 Per unit T500 No of units sold 60200 12700 Sales 20 1204000 40 508000 Cost of goods sold Direct Material 6.65 400600 12.76 162000 Direct labour 1.99 120100 3.35 42500 Manufacturing OH-Note 6.24 375913 10.45 132720 Total 14.88 896613 26.56 337220 Product margin 5.12   307387 13.44 170780 Note Total B300 T500 Total Manufacturing OH 508633 Total direct labor dollar 162600 120100 42500 OH/DL dollar 3.13 Allocated OH 508633 375913 132720

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