Hi-Tek Manufacturing, Inc., makes two types of industrial component parts—the B3
ID: 2538330 • 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 60,100 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:
The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $58,000 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:
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.
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.)
product margin??
Hi-Tek Manufacturing Inc.Income Statement Sales $ 1,710,000 Cost of goods sold 1,230,814 Gross margin 479,186 Selling and administrative expenses 580,000 Net operating loss $ (100,814 )
Explanation / Answer
Hi-Tek Manufacturing Inc
B 300
T 500
Total
Sales
$1,202,000
$508,000
$1,710,000
Direct materials
$400,500
$162,700
$563,200
Direct labor
$120,400
$42,400
$162,800
Manufacturing overhead
$373,339
$131,475
$504,814
Selling and administrative costs
$58,000
$109,000
$167,000
Total product costs
$952,240
$445,574
$1,397,814
Product margin
$249,760
$62,426
$312,186
Working:
Determination of predetermined manufacturing overhead rate using direct labor cost as allocation basis:
Total manufacturing overhead $504,814
Direct labor cost $162,800
Predetermined overhead rate = $504,814/$162,800 = $3.101 per direct labor cost
B300
T500
Total
Sales
$1,202,000
$508,000
$1,710,000
Direct materials
$400,500
$162,700
$563,200
Direct labor
$120,400
$42,400
$162,800
manufacturing overhead -
machining
$121,002
$84,152
$205,154
Setups
$32,760
$105,000
$137,760
product sustaining
50,500
$50,500
$101,000
Total costs
$725,162
$444,752
$1,169,914
Product margin
$476,838
$63,248
$540,086
Activity based costing, product margins –
B300
T500
Total
product margin
$476,838
$63,248
$540,086
Activity Rates
Activity cost pools
Total cost
Usage
Activity Rate
Machining
$205,154
153,100 MHs
$1.34 per hour
Setups
$137,760
328 setup hours
$420 per setup
Product Sustaining
$101,000
2 products
$50,500 per product
Overhead Assigned to:
B300
Usage
Activity rate
Total cost
Machining
90,300 MHs
$1.34 per hour
$121,002
Setups
78
$420 per setup hr
$32,760
Product Sustaining
1
50,500 per product
$50,500
Total overhead
$204,262
T500
Usage
Activity rate
Total cost
Machining
62,800 MHs
$1.34 per hour
$84,152
Setups
250
$420 per setup hr
$105,000
Product Sustaining
1
50500 per product
$50,500
Total overhead
$239,652
Note: the other activity pool (organization-sustaining costs) does not form part of the product margin statement under activity based costing as the same is not assigned for the products – B300 and T500.
Traditional Costing System:
B300
% to total cost
T500
Total
Direct materials
$400,500
71.11%
$162,700
28.89%
$563,200
Direct labor
$120,400
73.96%
$42,400
26.04%
$162,800
Manufacturing overhead
$373,339
73.96%
$131,475
26.04%
$504,814
selling and administration costs
$58,000
34.73%
$109,000
65.27%
$167,000
Total costs assigned to products
$952,239
68.12%
$445,575
31.88%
$1,397,814
other selling and administration costs
$413,000
Total
$1,810,814
Activity based costing:
Direct materials
$400,500
71.11%
$162,700
28.89%
$563,200
Direct labor
$120,400
73.96%
$42,400
26.04%
$162,800
Manufacturing overhead -
machining
$121,002
58.98%
$84,152
41.10%
$205,154
Setups
$32,760
23.78%
$105,000
76.21%
$137,760
product -sustaining
$50,500
50%
$50,500
50%
$101,000
other manufacturing overhead
$60,900
selling and administration costs
$413,000
$1,643,814
The comparison between traditional costing system and activity based costing system reveals a significant difference in the way the manufacturing overhead is assigned to products. Under the activity based costing approach, the overhead costs are assigned based on usage and hence shows accurate allocation, unlike the predetermined rate based on direct labor costs used under traditional costing method.
B 300
T 500
Total
Sales
$1,202,000
$508,000
$1,710,000
Direct materials
$400,500
$162,700
$563,200
Direct labor
$120,400
$42,400
$162,800
Manufacturing overhead
$373,339
$131,475
$504,814
Selling and administrative costs
$58,000
$109,000
$167,000
Total product costs
$952,240
$445,574
$1,397,814
Product margin
$249,760
$62,426
$312,186
Working:
Determination of predetermined manufacturing overhead rate using direct labor cost as allocation basis:
Total manufacturing overhead $504,814
Direct labor cost $162,800
Predetermined overhead rate = $504,814/$162,800 = $3.101 per direct labor cost
- Computation of product margins for B300 and T500 under the activity based costing system:
B300
T500
Total
Sales
$1,202,000
$508,000
$1,710,000
Direct materials
$400,500
$162,700
$563,200
Direct labor
$120,400
$42,400
$162,800
manufacturing overhead -
machining
$121,002
$84,152
$205,154
Setups
$32,760
$105,000
$137,760
product sustaining
50,500
$50,500
$101,000
Total costs
$725,162
$444,752
$1,169,914
Product margin
$476,838
$63,248
$540,086
Activity based costing, product margins –
B300
T500
Total
product margin
$476,838
$63,248
$540,086
Activity Rates
Activity cost pools
Total cost
Usage
Activity Rate
Machining
$205,154
153,100 MHs
$1.34 per hour
Setups
$137,760
328 setup hours
$420 per setup
Product Sustaining
$101,000
2 products
$50,500 per product
Overhead Assigned to:
B300
Usage
Activity rate
Total cost
Machining
90,300 MHs
$1.34 per hour
$121,002
Setups
78
$420 per setup hr
$32,760
Product Sustaining
1
50,500 per product
$50,500
Total overhead
$204,262
T500
Usage
Activity rate
Total cost
Machining
62,800 MHs
$1.34 per hour
$84,152
Setups
250
$420 per setup hr
$105,000
Product Sustaining
1
50500 per product
$50,500
Total overhead
$239,652
Note: the other activity pool (organization-sustaining costs) does not form part of the product margin statement under activity based costing as the same is not assigned for the products – B300 and T500.
- Quantitative comparison of the traditional and activity based cost assignments:
Traditional Costing System:
B300
% to total cost
T500
Total
Direct materials
$400,500
71.11%
$162,700
28.89%
$563,200
Direct labor
$120,400
73.96%
$42,400
26.04%
$162,800
Manufacturing overhead
$373,339
73.96%
$131,475
26.04%
$504,814
selling and administration costs
$58,000
34.73%
$109,000
65.27%
$167,000
Total costs assigned to products
$952,239
68.12%
$445,575
31.88%
$1,397,814
other selling and administration costs
$413,000
Total
$1,810,814
Activity based costing:
Direct materials
$400,500
71.11%
$162,700
28.89%
$563,200
Direct labor
$120,400
73.96%
$42,400
26.04%
$162,800
Manufacturing overhead -
machining
$121,002
58.98%
$84,152
41.10%
$205,154
Setups
$32,760
23.78%
$105,000
76.21%
$137,760
product -sustaining
$50,500
50%
$50,500
50%
$101,000
other manufacturing overhead
$60,900
selling and administration costs
$413,000
$1,643,814
The comparison between traditional costing system and activity based costing system reveals a significant difference in the way the manufacturing overhead is assigned to products. Under the activity based costing approach, the overhead costs are assigned based on usage and hence shows accurate allocation, unlike the predetermined rate based on direct labor costs used under traditional costing method.
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