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Problem 6-16 Comparing Traditional and Activity-Based Product Margins [LO6-1, LO6-3, LO6-4, LO6-5] Hi-Tek Manufacturing Inc. makes...

Problem 6-16 Comparing Traditional and Activity-Based Product Margins [LO6-1, LO6-3, LO6-4, LO6-5] 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 below: Hi-Tek Manufacturing Inc. Income Statement Sales $ 1,714,000 Cost of goods sold 1,222,230 Gross margin 491,770 Selling and administrative expenses 630,000 Net operating loss $ (138,230) 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: B300 T500 Total Direct materials $ 400,800 $ 162,200 $ 563,000 Direct labor $ 120,900 $ 42,200 163,100 Manufacturing overhead 496,130 Cost of goods sold $ 1,222,230 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 $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 Activity Activity Cost Pool (and Activity Measure) Overhead B300 T500 Total Machining (machine-hours) $ 203,490 90,100 62,900 153,000 Setups (setup hours) 132,440 71 230 301 Product-sustaining (number of products) 100,000 1 1 2 Other (organization-sustaining costs) 60,200 NA NA NA Total manufacturing overhead cost $ 496,130 Required 1. Compute the product margins for the B300 and T500 under the company’s traditional costing system. (Do not round your overhead rate. Round your other intermediate and final answers to the nearest whole number.) 2. Compute the product margins for B300 and T500 under the activity-based costing system. (Negative product margins should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places.) 3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Do not round your overhead rate. Round your other intermediate calculations and final answers to the nearest whole number. Round your "Percentage" answer to 1 decimal place. (i.e. .1234 should be entered as 12.3))

Solutions

Expert Solution

1 Compute the product margins for the B300 and T500 under the company’s traditional costing system
Predetermined Manufacturing overhead Rate Estimated Manufacturing cost/ Estimated direct Labor
496130/(120900+42200)
3.04
B300 T500 Total
Sales 1210000 504000 1714000
Direct Materials 400800 162200 563000
Direct Labor 120900 42200 163100
Manufacturing overhead Applied 367762.8265 128367.1735 496130
Total Manufacturing Costs 889462.8265 332767.1735 1222230
Product Margin 320537.1735 171232.8265 491770
2 Compute the product margins for B300 and T500 under the activity-based costing system
B300 T500 Total
Sales 1210000 504000 1714000
Direct Materials 400800 162200 563000
Direct Labor 120900 42200 163100
Advertising Expense $56,000 $104,000 160000
Manufacturing overhead assigned
Machining Pool $119,833.0 $83,657.000 203490
Setup Pool $31,240 $101,200 132440
Product Sustaining $50,000 $50,000 100000
Total Costs Assigned $778,773.0 $543,257.0 $1,322,030.0
Product Margin $431,227.0 ($39,257.0) $391,970.0
Cost 1st Stage Cost
Pool Pool Activity Driver Usage Pool
Activity Cost Pool Driver Allocations B300 T500 Total Rates
Machining MHr. $203,490 90,100 62,900 153,000 $1.330
Setups Setup Hrs. 132,440 71 230 301 $440
Product Sustaining # of Products 100,000 1 1 2 $50,000
Organizational Sustaining NA 60,200 NA NA NA
Total Manufacturing Costs $496,130
3 Prepare a quantitative comparison of the traditional and activity-based cost assignments.
Traditional Costing
B300 T500 Total
Sales 1210000 504000 1714000
Direct Materials 400800 162200 563000
Direct Labor 120900 42200 163100
Manufacturing overhead Applied 367762.8265 128367.1735 496130
Total Manufacturing Costs 889462.8265 332767.1735 1222230
Product Margin 320537.1735 171232.8265 491770
Selling and Administrative Expenses $630,000
Net Operating Expenses ($138,230)
Total Costs Accounted For $1,852,230
Activity Based Costing
B300 T500 Total
Sales 1210000 504000 1714000
Direct Materials 400800 162200 563000
Direct Labor 120900 42200 163100
Advertising Expense 56000 104000 160000
Manufacturing overhead assigned
Machining Pool 119833 83657 203490
Setup Pool 31240 101200 132440
Product Sustaining 50000 50000 100000
Total Costs Assigned 778773 543257 1322030
Product Margin 431227 -39257 391970
Selling and Administrative (Indirect) 470000
Organisational Sustaining Costs 60,200
Net Operating Income (138,230)
Total Costs Accounted for 1,852,230
Difference in Product Margins 110689.8265 -210489.826 -99800

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