In: Accounting
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))
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 | |||||||||