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 $ 1,761,600 1,229,164 532,436 640,000e $ (107,564) Hi-Tek produced and sold 60,300 units of B300 at a price of $21 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: B300 T500 Direct materials Direct labor Manufacturing overhead Cost of goods sold $ 400,600 $162,300 $562,900 162,400 503,864 $ 1,229,164 s 120,400 42,000 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $60,000 and $106,000 of the company's advertising expenses could be directly traced to 8300 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: Activit T500 Manufacturing Activity Cost Pool (and Machining (machine-hours) Setups (setup hours) Product-sustaining (number of products) Other (organization-sustaining costs) Total manufacturing overhead cost Activity Measure) Overhead $207,264 134,000 101,800 60,800 $ 503,864 8300 90,300 62,100 152,400 335 260 NA NA 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

1. Product Margin as per Traditional Method:

2. Product Margin under activity based costing:

Working for allocation of Mfg. overhead based on Activity based costing:

Note: Since no allocation base is provided in question in relation to selling & admin expense under absorption costing, the same is not assigned/allocated to any product.

B300 T500 Total No. of units                60,100             12,700                72,800 Sales          11,41,900          4,95,300          16,37,200 Material            4,00,500          1,62,000            5,62,500 Labour            1,20,000             42,400            1,62,400 Mfg. Overhead            3,89,172          1,37,508            5,26,680 Product Margin            2,32,228          1,53,392            3,85,620 Product Margin (%) 20.34% 30.97%

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