Hi-Tek Manufacturing Inc. makes two types of industrial component parts- the B30

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 Cost of goods sold $1,712,000 1,233,380 Gross margin Selling and administrative expenses 478,620 610,000 Net operating loss S (131,380) 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 Direct labor Manufacturing overhead $ 400,700 S 162,300 $ 563,000 162,700 507,680 S 120,400 S 42,300 Cost of goods sold 1,233,380 The company has created an activity-based costing system to evaluate the profitability of its products. Hi- Tek's ABC implementation team concluded that $53,000 and $102,000 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 B300 T500 Total Activity Cost Pool (and Activity Measure) Machining (machine-hours) Setups (setup hours) Product-sustaining (number of products) Other (organization-sustaining costs) 208,080 139,400 100,200 60,000 90,200 62,800 153,000 340 80 260 NA NA NA Total manufacturing overhead cost $ 507,680

Explanation / Answer

1. Compute the product margins for the B300 and T500 under the company's traditional costing system. PMOH Rate = Estimated total mfg. cost / Estimated total DL $ PMOH Rate = $507,680 / $162,700 $3 per DL$ B300 T500 Total Sales $1,204,000 $508,000 $1,712,000 Direct materials $400,700 $162,300 $563,000 Direct labor 120,400 42,300 162,700 Manufacturing overhead applied 375,689 131,991 507,680 Total manufacturing costs $896,789 $336,591 $1,233,380 Product margin (Traditional Gross Margin) $307,211 $171,409 $478,620 Note: All of the mfg. overhead costs is applied to either B300 or T500. 2. Compute the product margins for the B300 and T500 under the activity-based costing system. B300 T500 Total Sales $1,204,000 $508,000 $1,712,000 Direct materials $400,700 $162,300 $563,000 Direct labor 120,400 42,300 162,700 Advertising expense 53,000 102,000 155,000 MOH assigned (2nd Stage Allocations)      Machining pool 122,672 85,408 208,080      Setup pool 32,800 106,600 139,400      Product sustaining 50,100 50,100 100,200 Total costs assigned $779,672 $548,708 $1,328,380 Product margin (ABC) $424,328 ($40,708) $383,620 3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. Traditional Costing B300 T500 Total Sales $1,204,000 $508,000 $1,712,000 Direct materials $400,700 $162,300 $563,000 Direct labor 120,400 42,300 162,700 Manufacturing overhead applied 375,689 131,991 507,680 Total manufacturing costs $896,789 $336,591 $1,233,380 Product margin (Traditional) $307,211 $171,409 $478,620 Selling & administrative 610,000      Net operating costs ($131,380) Note: Total costs accounted for $1,843,380 ABC Costing B300 T500 Total Sales $1,204,000 $508,000 $1,712,000 Direct materials $400,700 $162,300 $563,000 Direct labor 120,400 42,300 $162,700 Advertising expense (traced) 53,000 102,000 155,000 Mfg. Overhead assigned      Machining pool 122,672 85,408 208,080      Setup pool 32,800 106,600 139,400      Product sustaining 50,100 50,100 100,200 Total costs assigned $779,672 $548,708 $1,328,380 Product margin (ABC) $424,328 ($40,708) $383,620 $95,000 Selling & Administrative (Indirect) 455,000 Organizational Sustaining Costs 60,000 95,000 Net operating income ($131,380) Note: Total costs accounted for $1,843,380 Difference in Product Margins $117,117 ($212,117) ($95,000) ($95,000) The traditional costing system uses one unit-level allocation base, direct labor dollars,   to assign manufacturing overhead costs. B300 T500 Total      Direct labor dollars $120,400 $42,300 $162,700      Consumption ratio: 0.740 0.260 100% The ABC costing system uses three different pool drivers and different consumption ratios. 1. Machining pool: Cost driver = Number of machine hours (unit-level driver) B300 T500 Total      Machine hours 90,200 62,800 153,000      Consumption ratio:90200/153000 0.590 0.410 100% 2. Setups pool: Cost driver = Number of setup hours (batch-level driver) B300 T500 Total      Setup hours 80 260 340      Consumption ratio: 0.23529412 0.764705882 100% 3. Product Sustaining pool: Cost driver = Number of products (product-level driver) B300 T500 Total      # of Products 1 1 2      Consumption ratio: 0.5 0.5 100%

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