In: Accounting
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 | $ | 1,763,700 | |
Cost of goods sold | 1,210,017 | ||
Gross margin | 553,683 | ||
Selling and administrative expenses | 610,000 | ||
Net operating loss | $ | (56,317 | ) |
Hi-Tek produced and sold 60,400 units of B300 at a price of $21 per unit and 12,700 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 | $ | 401,000 | $ | 162,400 | $ | 563,400 |
Direct labor | $ | 120,800 | $ | 42,100 | 162,900 | |
Manufacturing overhead | 483,717 | |||||
Cost of goods sold | $ | 1,210,017 | ||||
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 Overhead |
Activity | |||||
Activity Cost Pool (and Activity Measure) | B300 | T500 | Total | |||
Machining (machine-hours) | $ | 200,037 | 90,300 | 62,400 | 152,700 | |
Setups (setup hours) | 122,980 | 76 | 210 | 286 | ||
Product-sustaining (number of products) | 100,400 | 1 | 1 | 2 | ||
Other (organization-sustaining costs) | 60,300 | NA | NA | NA | ||
Total manufacturing overhead cost | $ | 483,717 | ||||
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
B300 | T500 | Total | |
No. of units | 60,400 | 12,700 | 73,100 |
Sale price per unit | $ 21 | $ 39 | |
Sale Value | $ 1,268,400 | $ 495,300 | $ 1,763,700 |
Direct Material | $ 401,000 | $ 162,400 | $ 563,400 |
Direct Labor | $ 120,800 | $ 42,100 | $ 162,900 |
Total Direct Costs | $ 521,800 | $ 204,500 | $ 726,300 |
Manufacturing Overhead (Traditional Costing) | $ 358,705 | $ 125,012 | $ 483,717 |
Total Product Cost | $ 880,505 | $ 329,512 | $ 1,210,017 |
Product Margin | $ 387,895 | $ 165,788 | $ 553,683 |
Answer 2
B300 | T500 | Total | |
No. of units | 60,400 | 12,700 | 73,100 |
Sale price per unit | $ 21 | $ 39 | $ - |
Sale Value | $ 1,268,400 | $ 495,300 | $ 1,763,700 |
Direct Material | $ 401,000 | $ 162,400 | $ 563,400 |
Direct Labor | $ 120,800 | $ 42,100 | $ 162,900 |
Total Direct Costs | $ 521,800 | $ 204,500 | $ 726,300 |
Manufacturing Overhead (ABC) | $ 257,173 | $ 326,244 | $ 583,417 |
Total Product Cost | $ 778,973 | $ 530,744 | $ 1,309,717 |
Product Margin | $ 489,427 | $ (35,444) | $ 453,983 |
Note:
Activity | Activity Cost Pool | Cost driver | B300 | T500 | Total |
Machining | $ 200,037 | Machine hours | $ 118,293 | $ 81,744 | $ 200,037 |
Setups | $ 122,980 | Setup hours | $ 32,680 | $ 90,300 | $ 122,980 |
Product Sustaining | $ 100,400 | No. of products | $ 50,200 | $ 50,200 | $ 100,400 |
Advertising Cost | $ 160,000 | $ 56,000 | $ 104,000 | $ 160,000 | |
Total | $ 583,417 | $ 257,173 | $ 326,244 | $ 583,417 |
Answer 3
B300 | T500 | ||||
Amount | % of total amount | Amount | % of total amount | Amount | |
Traditional Cost system | |||||
Direct material | $ 401,000 | 71.2% | $ 162,400 | 28.8% | $ 563,400 |
Direct labour | $ 120,800 | 74.2% | $ 42,100 | 25.8% | $ 162,900 |
Manufacturing overhead | $ 358,705 | 74.2% | $ 125,012 | 25.8% | $ 483,717 |
Total cost assigned to products | $ 880,505 | $ 329,512 | $ 1,210,017 | ||
Selling and administrative | $ 610,000 | ||||
Total Cost | $ 1,820,017 | ||||
B300 | T500 | Total | |||
Amount | % | Amount | % | Amount | |
Activity Based Costing System | |||||
Direct Costs | |||||
Direct material | $ 401,000 | 71.2% | $ 162,400 | 28.8% | $ 563,400 |
Direct labour | $ 120,800 | 74.2% | $ 42,100 | 25.8% | $ 162,900 |
Advertising | $ 56,000 | 35.0% | $ 104,000 | 65.0% | $ 160,000 |
Indirect Costs | |||||
Machining | $ 118,293 | 59.1% | $ 81,744 | 40.9% | $ 200,037 |
Setups | $ 32,680 | 26.6% | $ 90,300 | 73.4% | $ 122,980 |
Product Sustaining | $ 50,200 | 50.0% | $ 50,200 | 50.0% | $ 100,400 |
Total Cost assigned to products | $ 778,973 | 59.5% | $ 530,744 | 40.5% | $ 1,309,717 |
Costs not assigned to products | |||||
Other | $ 60,300 | ||||
Selling and administrative | $ 450,000 | ||||
Total Costs | $ 1,820,017 |