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 $ 1,695,400 Cost of goods sold 1,234,000 Gross margin 461,400 Selling and administrative expenses 640,000 Net operating loss $ (178,600 ) Hi-Tek produced and sold 60,200 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 $ 400,500 $ 162,700 $ 563,200 Direct labor $ 120,800 $ 43,000 163,800 Manufacturing overhead 507,000 Cost of goods sold $ 1,234,000 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 $109,000 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) $ 215,040 90,800 62,800 153,600 Setups (setup hours) 129,860 72 230 302 Product-sustaining (number of products) 101,400 1 1 2 Other (organization-sustaining costs) 60,700 NA NA NA Total manufacturing overhead cost $ 507,000 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.

Answer 1

Ans. 1                      Compute the product margin under the Traditional costing system

                                                                            B300                      T500

Sales                                                               1204000               491400

Direct material                                                400500                162700

Direct labour                                                    120800                43000

Overhead using plantwide rate                    373900               133100

admin and selling exp.                                   54000                 109000

Gross profit                                                       254800                43600

Gross profit margin                                        21.16%               8.87%

*Calculation of Plant wide overhead rate = 507000/163800 = 3.0952 per labour dollar

B300 = 120800X3.09      = 373900

T500 = 43000X3.0952    = 133100

2. compute product margin under ABC system

                                                                           B300                      T500

Sales (a)                                                      1204000               491400

Less: Exp

Direct material                                                400500                162700

Direct labour                                                    120800                43000

Machine cost (215040/153600X90800)     127120            87920    

                         (215040/153600X62800)   

Setups cost (129860/302X72),                    30960    98900

                       (129860/302X230)

Product sustaining (101400/2)                    50700                  50700

Other Sustaining cost                                    30350                  30350

Total Manufacturing o/h allocated(b)          239130                267840

Admin exp.(c)                                                   54000                109000

Gross Margin (a-b-c)                389570               -91140

Product margin                                               32.36%               -18.55

Ans 3                                     Quantitative comparison between Traditional and ABC

                           B300    T500

Overhead unver traditional costing              373900            133100

Overhead under ABC costing 239130    267840        

Difference in o/h allocating                           134770             134740

Profit margin under traditional costing         254800    43600                                              

profit margin under ABC                                 389570            -91140

Difference                                                          134770            134740