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 produced and sold 60,100 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:

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 $107,000 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.

Hi-Tek Manufacturing Inc.
Income Statement Sales $ 1,701,200 Cost of goods sold 1,210,485 Gross margin 490,715 Selling and administrative expenses 560,000 Net operating loss $ (69,285 )

Explanation / Answer

B300 – 60100 units @20/unit

B300 – 60100 units @20/unit

T500 – 12800 units @39 /unit Traditional costing system Overhead rate = manufacturing overhead /direct labor (483785/163500) 2.958929664 1.Product margin under traditional costing method : Particulars B300 T500 Total Sales 1,202,000 499,200 1,701,200 Less: Direct Material 400,600 162,600 563,200 Direct Labour 120,600 42,900 163,500 Manufacturing Overhead @ 177,832 37,874 215,706 2.96 per direct labour amount Total cost of goods sold 699,032 243,374 942,406 Product Margin (Sales –COGS) 502,968 255,826 758,794 2.Product margin under Activity based costing system: Particulars B300 T500 Total Sales 1,202,000 499,200 1,701,200 Less: Direct Cost Direct Material 400,600 162,600 563,200 Direct Labour 120,600 42,900 163,500 Advertising expense 56,000 107,000 163,000 Indirect costs Machining(909:626) 119,079 82,006 201,085 setups          (70:230) 28,000 92,000 120,000 Product sustaining 50,900 50,900 101,800 Total cost assigned to product 775,179 537,406 1,312,585 Product Margin (Sales –COGS) 426,821 -38,206 388,615 3.Quantitative comparison under traditional costing method : Particulars B300 % T500 % Total Less: Direct Material 400,600 71% 162,600 29% 563,200 Direct Labour 120,600 74% 42,900 26% 163,500 Manufacturing Overhead @ 356,847 126,938 483,785 74% 26% 2.96 per direct labour amount Total cost of goods sold(assigned to product) 878,047 73% 332,438 27% 1,210,485 Selling & administration cost 560,000 Total Cost 1,770,485 4.Quantitative comparison under Activity based costing system: Particulars B300 % T500 % Total Direct Cost Direct Material 400,600 71% 162,600 29% 563,200 Direct Labour 120,600 74% 42,900 26% 163,500 Advertising expense 56,000 34% 107,000 66% 163,000 Indirect costs 0 Machining(904:627) 119,079 59% 82,006 41% 201,085 setups          (72:290) 28,000 23% 92,000 77% 120,000 Product sustaining 50,900 50% 50,900 50% 101,800 Total cost assigned to product 775,179 59% 537,406 41% 1,312,585 Cost not assigned to the product Selling & administration cost 397,000 Other 60900 Total Cost 1,770,485

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