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 $ 1,712,000 Cost of goods sold 1,236,330 Gross margin 475,670 Selling and administrative expenses 580,000 Net operating loss $ (104,330 ) 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 $ 400,300 $ 162,900 $ 563,200 Direct labor $ 120,900 $ 42,500 163,400 Manufacturing overhead 509,730 Cost of goods sold $ 1,236,330 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $56,000 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) $ 214,760 90,500 62,900 153,400 Setups (setup hours) 134,070 77 250 327 Product-sustaining (number of products) 100,600 1 1 2 Other (organization-sustaining costs) 60,300 NA NA NA Total manufacturing overhead cost $ 509,730 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 Manufacturing overhead rate = 509730/163400 3.120 B300 T500 Total Sales 1204000 508000 1712000 Cost of goods sold Direct material 400300 162900 563200 Direct labor 120900 42500 163400 Manufacturing overheads 377150 132580 509730 (120900*3.120) (42500*3.120) Total cost of goods sold 898350 337980 1236330 Product margin 305650 170020 475670 Selling and administrative 580000 Net operating Loss -104330 ABC Total cost Total cost driver Cost per driver B300 T500 Total Machining cost 214760 153400 1.4 126700 88060 214760 Setup cost 134070 327 410 31570 102500 134070 Product sustaining 100600 2 50300 50300 50300 100600 Other cost 60300 509730 2 ABC B300 T500 Total Sales 1204000 508000 1712000 Cost Direct material 400300 162900 563200 Direct labor 120900 42500 163400 Machining cost 126700 88060 214760 Indirect cost Setup cost 31570 102500 134070 Product sustaining 50300 50300 100600 Advertising 56000 100000 156000 Total cost 785770 546260 1332030 Product margin 418230 -38260 379970 Other cost 60300 Other selling and admin 424000 Net operating loss -104330

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