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 below:

Hi-Tek Manufacturing Inc. Income Statement
Sales	$	1,649,900
Cost of goods sold		1,209,425
Gross margin		440,475
Selling and administrative expenses		560,000
Net operating loss	$	(119,525)

Hi-Tek produced and sold 60,100 units of B300 at a price of $19 per unit and 12,700 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	$	162,400	$	563,200
Direct labor	$	121,000	$	42,500		163,500
Manufacturing overhead						482,725
Cost of goods sold					$	1,209,425

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $60,000 and $108,000 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)	$	201,085	90,500	63,000	153,500
Setups (setup hours)		120,540	74	220	294
Product-sustaining (number of products)		101,000	1	1	2
Other (organization-sustaining costs)		60,100	NA	NA	NA
Total manufacturing overhead cost	$	482,725

Required

1.	Compute the product margins for the B300 and T500 under the company’s traditional costing system. (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole dollars.)

      

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. (Round your intermediate calculations to 2 decimal places and "Percentage" answer to 1 decimal place. (i.e. .1234 should be entered as 12.3) and other answers to nearest whole dollar amounts.)

     

     

Answer 1

PRODUCT MARGINS
AS PER ABSORPTION COSTING
		B300	T500
Sales		$1,141,900.00	$508,000.00
		(60100*19)	(12700*40)
LESS:-
Direct Material		$400,800.00	$162,400.00
Direct Labour		$121,000.00	$42,500.00
Manufacturing OH		$357,246.02	$125,478.98
		(121000/163500)*482725	(42500/163500)*482725
Advertising Exp.		$60,000.00	$108,000.00
INCOME		$202,853.98	$69,621.02
Margin		17.76%	13.70%		ANS
AS PER ACTIVITY BASED COSTING
		B300	T500
Sales		$1,141,900.00	$508,000.00
		(60100*19)	(12700*40)
LESS:- VARIABLE COST
Direct Material		$400,800.00	$162,400.00
Direct Labour		$121,000.00	$42,500.00
Less Overhead
Machining	Machine Hours	$118,555.00	$82,530.00
		(90500/153500)*201085	(63000/153500)*201085
Setup	Setup Hours	$30,340.00	$90,200.00
		(74/294)*120540	(220/294)*120540
Product	No. of Products	$50,500.00	$50,500.00
Sustaining		(1*101000/2)	(1*101000/2)
Other		-	-
Less :-
Advertisement Cost		$60,000.00	$108,000.00
	INCOME	$360,705.00	$28,130.00
	MARGIN	31.59%	-5.54%		ANS
Quantitave Comparision		TRADITIONAL		ABC
		B300	T500	B300	T500
Sales		$1,141,900.00	$508,000.00	$1,141,900.00	$508,000.00
Less :- Variable Cost		$521,800.00	$204,900.00	$521,800.00	$204,900.00
Less:- OH		$357,246.02	$125,478.98	$199,395.00	$223,230.00
Less:- Advertising Cost		$60,000.00	$108,000.00	$60,000.00	$108,000.00
INCOME		$202,853.98	$69,621.02	$360,705.00	$28,130.00
Margin		17.76%	13.70%	31.59%	-5.54%

Thank you

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