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 60,500 units of B300 at a price of $20 per unit and 12,600 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:

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 $106,000 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 $ 1,714,000 Cost of goods sold 1,231,554 Gross margin 482,446 Selling and administrative expenses 600,000 Net operating loss $ (117,554 )

Explanation / Answer

B300 T500 Total Units 60500 12600 Sales Price 20 40 Direct Material 400700 162200 562900 Total Manufacturing OH 505754 Direct Labor 120900 42200 163100 Total Direct Labor Dollars 163100 Manufacturing OH 505754 Overhead Per Dollars 3.10 Cost of Goods Sold 1231754 1 B300 T500 1.998347107 3.349206 Sales Price 20.00 40.00 6.196640362 10.3855 Less: Direct Material 6.62 12.87 Less: Direct Labor 2.00 3.35 Less: Maufacturing OH 6.20 10.39 Product Margin 5.18 13.39 2 B300 T500 Activity Pools Amt B300 T500 Total Per Driver Sales Price 20.00 40.00 Machining 209304 91000 62900 153900 1.36 Less: Direct Material 6.62 12.87 Setups 135450 75 240 315 430 Less: Direct Labor 2.00 3.35 Product Sustaining 100600 1 1 2 50300 Less: Maufacturing OH 3.41 18.97 Other 60400 NA NA NA Product Margin 7.97 4.81 Total M OH 505754 Allocation: B300 T500 Machining 123760 85544 Setups 32250 103200 Product Sustaining 50300 50300 Total M OH 206310 239044 Units 60500 12600 B300 T500 Manufacturing OH 3.41 18.97 60500 12600 3 B300 T500 Total Traditional Cost System Amount % Amount % Amount Direct Material 4,00,700 44.70% 1,62,200 48.38% 5,62,900 Direct Labor 1,20,900 13.49% 42,200 12.59% 1,63,100 Manufacturing OH 3,74,897 41.82% 1,30,857 39.03% 5,05,754 Total Cost assigned to products 8,96,497 100.00% 3,35,257 100.00% 12,31,754 Traditional Cost System Amount % Amount % Amount Direct Costs: Direct Material 4,00,700 55% 1,62,200 36.58% 5,62,900 Direct Labor 1,20,900 17% 42,200 9.52% 1,63,100 Indirect Costs: Machining 1,23,760 17% 85,544 19.29% 2,09,304 Setups 32,250 4% 1,03,200 23.27% 1,35,450 Product Sustaining 50,300 7% 50,300 11.34% 1,00,600 Total Cost assigned to products 7,27,910 100% 4,43,444 100.00% 11,71,354 Costs not assigned to products: Others 60400 Total Cost 12,31,754

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