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 $ 1,705,200 Cost of goods sold 1,254,256 Gross margin 450,944 Selling and administrative expenses 590,000 Net operating loss $ (139,056 ) Hi-Tek produced and sold 60,300 units of B300 at a price of $20 per unit and 12,800 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: B300 T500 Total Direct materials $ 400,300 $ 162,400 $ 562,700 Direct labor $ 120,600 $ 42,700 163,300 Manufacturing overhead 528,256 Cost of goods sold $ 1,254,256 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 $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: Manufacturing Overhead Activity Activity Cost Pool (and Activity Measure) B300 T500 Total Machining (machine-hours) $ 210,036 90,200 62,000 152,200 Setups (setup hours) 155,320 73 280 353 Product-sustaining (number of products) 102,000 1 1 2 Other (organization-sustaining costs) 60,900 NA NA NA Total manufacturing overhead cost $ 528,256 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

Solution 1:

Solution 2:

Solution 3:

Overhead Allocation - Traditional Costing System Particulars B300 T500 Total Estimated annual Production (In units) 60300 12800 Direct Labor Cost 120600 42700 163300 Overhead Cost Allocation basis direct labour dollar (Overhead / Total direct labor dollar * Labor dollar of model) $390,126.60 $138,129.40 $528,256.00 Manufacturing overhead cost per unit (Allocated Overhead / Nos of units) $6.47 $10.79

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