Hi-Tek Manufacturing Inc. makes two types of industrial component parts—the B300

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 Manufacturing Inc.
Income Statement
Sales $ 1,699,200
Cost of goods sold 1,223,420
Gross margin 475,780
Selling and administrative expenses 590,000
Net operating loss $ (114,220)

Hi-Tek produced and sold 60,000 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 $ 400,400 $ 162,700 $ 563,100
Direct labor $ 120,700 $ 42,100 162,800
Manufacturing overhead 497,520
Cost of goods sold $ 1,223,420

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 $109,000 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
Activity Cost Pool (and Activity Measure) Overhead B300 T500 Total
Machining (machine-hours) $ 214,340 90,800 62,300 153,100
Setups (setup hours) 121,880 77 200 277
Product-sustaining (number of products) 100,400 1 1 2
Other (organization-sustaining costs) 60,900 NA NA NA
Total manufacturing overhead cost $ 497,520

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.)

Compute the product margins for 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.)

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))

Explanation / Answer

1) Traditional costing : B300 T500 Total DM 400400 162700 563100 DL 120700 42100 162800 Manufacturing overhead 368861 128659 497520 (497520/162800=3.056) COGS 889961 333459 1223420 Sales 1200000 499200 1699200 Margin 310039 165741 475780 2) ABC COSTING: allocation of overhead: Total B300 T500 Machining 214340 214340*90800/153100) =127120 214340*62300/153100) =87220 Setups 121880 121880*77/277=33880 121880*200/277=88000 Product-sustaining 100400 50200 50200 Other 60900 0 0 Total 497520 211200 225420 Product Margin: B300 T500 Total DM 400400 162700 563100 DL 120700 42100 162800 Manufacturing overhead 211200 225420 436620 Manufacturing O/H -other 0 0 60900 COGS 732300 430220 1223420 Sales 1200000 499200 1699200 margin 467700 68980 475780 3) Comparison: B300 T500 Traditional Product margin 310039 165741 Abc Product margin 467700 68980 Difference -157661 96761 Unallocated M. Overhead 60900 Total -96761 96761

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.