Hi-Tek Manufacturing Inc. makes two types of industrial component parts-the B300

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 Gross margin Selling and administrative expenses Net operating loss $ 1,699,400 1,243,594 455,806 590,000 134,194 Hi-Tek produced and sold 60,400 units of B300 at a price of $20 per unit and 12,600 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 400,300 S 162,600 $562,900 162,900 517,794 $ 1,243,594 $ 120,800 42,100 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $58,000 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 Activity Cost Pool (and Activity Measure) Machining (machine-hours) Setups (setup hours) Product-sustaining (number of products) Other (organization-sustaining costs) Total manufacturing overhead cost Overhead $ 202,224 154,370 101,000 60,200 517,794 B300 90,700 62,500 153,200 359 79 280 NA NA NA

Explanation / Answer

Solution:

1) Product Margin under traditional costing system

B-300

T-500

Total

Sales (A)

$1,208,000

$491,400

Production Cost:

Direct materials

$400,300

$162,600

Direct labor

$120,800

$42,100

Applied Manufacturing Overheads

(Refer Note 1)

$383,975

$133,819

Production Cost (B)

$905,075

$338,519

Product Margin (A-B)

$302,925

$152,881

$455,806

Note 1 –

Under traditional costing, the overheads are calculated on predetermined basis by estimating total manufacturing overhead for the year and estimating allocation base (in this question allocation base is Direct labor hours).

Allocation Overhead Rate = Total Estimated Manufacturing Overheads / Total Estimated Direct labor hours

= $517,794 / 162,900

= $3.1786 per direct labor cost

Manufacturing Overhead Applied to B-300 Product = Direct labor Cost x Allocation Rate

= $120,800 x $3.1786

= $383,975

Manufacturing Overhead Applied to T-500 Product = Direct labor Cost x Allocation Rate

= $42,100 x $3.1786

= $133,819

Traditional / Absorption Costing System

- Product Cost refers to the costs used to fabricate/make/produce a product.

- Under Traditional/Absorption Costing, product cost includes both fixed and variable manufacturing expenses used to fabricate the product or service.

- It includes cost of direct material used, cost of direct labor, consumable supplies used and manufacturing/factory overheads (both variable as well as fixed factory overhead).

- Ending Inventory is valued on Production Cost.

- Product Cost does not include Selling, General and Administrative Expenses.

2) Product Margin using Activity Based Costing System

B-300

T-500

Total

Sales (A)

$1,208,000

$491,400

Production Cost:

Direct materials

$400,300

$162,600

Direct labor

$120,800

$42,100

Applied Manufacturing Overheads

$204,194

$253,400

Production Cost (B)

$725,294

$458,100

Product Margin (A-B)

$482,706

$33,300

$516,006

Note 2 --

Under this system, the overheads are allocated based on the activity on which they incurred or related and then find number of activity to be used to find out the activity rate for each activity.

Calculation of cost per activity

Activities

Manufacturing Overheads (a)

Total Activities

Cost per Activity

(b)

(a/b)

Machining

$202,224

153200

Machine Hours

$1.32

per MH

Setups

$154,370

359

Setups hours

$430

per setup

Product Sustaining

$101,000

2

Number of Products

$50,500

per product

Other

$60,200

NA

NA

NA

$517,794

Allocation of Overhead Costs based on the activity consumed by the each product

B-300

T-500

Activities

Rate per Cost driver Unit

Activity Consumed

Allocated Overhead Cost

Activity Consumed

Allocated Indirect Cost

(a)

(b)

(a*b)

(s)

(a*s)

Machining

$1.32

90700

$119,724

62500

$82,500

Setups

$430

79

$33,970

280

$120,400

Product Sustaining

$50,500

1

$50,500

1

$50,500

Other (Not traceable)

Total Assigned Overhead Cost

$204,194

$253,400

For Part 3 --- Please check format you provided. I think it is wrong. If it is the same then let me know i will solve this part also

B-300

T-500

Total

Sales (A)

$1,208,000

$491,400

Production Cost:

Direct materials

$400,300

$162,600

Direct labor

$120,800

$42,100

Applied Manufacturing Overheads

(Refer Note 1)

$383,975

$133,819

Production Cost (B)

$905,075

$338,519

Product Margin (A-B)

$302,925

$152,881

$455,806

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