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 $ 1,761,600 Cost of goods sold 1,211,980 Gross margin 549,620 Selling and administrative expenses 590,000 Net operating loss $ (40,380 ) 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 Total Direct materials $ 400,000 $ 162,300 $ 562,300 Direct labor $ 120,300 $ 42,300 162,600 Manufacturing overhead 487,080 Cost of goods sold $ 1,211,980 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $54,000 and $104,000 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) $ 208,080 90,400 62,600 153,000 Setups (setup hours) 116,800 72 220 292 Product-sustaining (number of products) 102,000 1 1 2 Other (organization-sustaining costs) 60,200 NA NA NA Total manufacturing overhead cost $ 487,080 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.

Problem 7-16 Comparing Traditional and Activity-Based Product Margins [LO7-1, LO7-3, LO7-4, LO7-5) 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 s 1,761,600 1.211,980 549, 620 590,000 (40,380 Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating loss 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 Total Direct materials Direct labor Manufacturing overhead Cost of goods sold 400,000 $162,300 $562,300 162,600 487,080 1,211,980 120,300 42,300

Explanation / Answer

Req 1: Product margin under Traditional costing B 300 T 500 Total Amount Amount Amount Sales revenue B300(60300 units @21) 1266300 T500(12700 units@39) 495300 1761600 Less: Product cost assigned-as calculated below 880668 331312 1211980 Less: Cost not assigned 590000 Product margin under traditional costing 385632 163988 -40380 Req 2: Product margin under ABC costing B 300 T 500 Total Amount Amount Amount Sales revenue B300(60300 units @21) 1266300 T500(12700 units@39) 495300 1761600 Less: Product cost assigned-as calculated below 723044 428736 1151780 Less: Cost not assigned 650200 Product margin under ABC costing 543256 66564 -40380 Req 3: Pre determined Plantwide overhead rate based on labour cost $ Overhead rate = Total overhead / Labour cost *100 (487080/162600) *100) = 299.56% 299.5571956 B 300 T 500 Total Amount % of Total Amount % of Total Amount Cost assigned to product Direct material 400000 71.14% 162300 28.86% 562300 Direct labour 120300 73.99% 42300 26.01% 162600 Overhead cost (299.56% of labour cost) 360368 73.99% 126712 26.01% 487080 Total cost assigned to product 880668 72.66% 331312 27.34% 1211980 Cost not assigned to product Selling & Admin Expense 590,000 TOTAL COST 1,801,980 Activity overhead rate Machining activity = Total overhead of activity/ Number of machine hours    (208080/153000) = 1.36 per machine hour Setup cost= Total setup activity cost/ number of setup (116800/292) = $ 400 per setup Product sustaining activity = Total overhead of activity / number of products (102000 /2) = $ 51,000 per product Req 3: Quantitative comparison under ABC B 300 T 500 Total Amount % of Total Amount % of Total Amount Machine hours 90400 hours 62600 hours Number of setups 72 setups 220 setups Cost assigned to product Direct material 400000 71.14% 162300 28.86% 562300 Direct labour 120300 73.99% 42300 26.01% 162600 Overhead cost: Machining Activity cost(1.36 per machine hour) 122944 59.08% 85136 40.92% 208080 Setup cost ($400 per setup) 28800 24.66% 88000 75.34% 116800 Product sustaining cost 51000 50.00% 51000 50.00% 102000 Total cost assigned to product 723044 62.78% 428736 37.22% 1151780 Cost not assigned to product Other Activity 60200 Selling & Admin Expense 590,000 TOTAL COST 1,801,980

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