Question

Hi-Tek Manufacturing, Inc., makes two types of industrial component parts—the B300 and the 1500. An absorption costing income statement for the most recent period is shown: Hi-Tek Manufacturing Inc. Income Statement Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating loss $ 1,763,400 1,213,504 549,896 580,000 $ (30,104) Hi-Tek produced and sold 60,200 units of B300 at a price of $21 per unit and 12,800 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 $ 400, 300 $ 120,500 T500 $ 162,500 $ 42,600 Direct materials Direct labor Manufacturing overhead Cost of goods sold Total $ 562,800 163, 100 487,604 $ 1,213,504 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 $102,000 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: Activity Cost Pool (and Activity Measure) Machining machine-hours) Setups (setup hours) Product-sustaining (number of products) Other (organization-sustaining costs) Manufacturing Overhead $ 204,484 122,220 100,600 60,300 Activity B300T500 90,200 62,400 71 220 1 1 NA NA Total 152,600 291 2 NA

Answer 1

Answer to Part 1.: Computation of Product Margins Using Traditional Approach: B300 T500 Total 1,264,200 499,200 1,763,400 Sales Costs: Direct Materials Direct Labor Manufacturing Overhead Applied Total Manufacturing Cost 400,300 120,500 360,247 881,047 162,500 42,600 127,357 332,457 562,800 163,100 487,604 1,213,504 Product Margin 383,153 166,743 549,896 Calculation: Predetermined Overhead Rate = Estimated Total Manufacturing Overhead Cost / Estimated Total DLH Predetermined Overhead Rate = $487,604/ $163,100 * 100 Predetermined Overhead Rate = 298.9601%

Answer to Part 2. Estimated Overhead Estimated Cost Activity 204,484 152,600 MH Activity Rate Activity Cost Pool Machining Machine Hours) 1.34 Setups (Setup Hours) Product Sustaining 122,220 100,600 291 Setups 2 420 50,300 per MH per Setup Hours per Product | Calculation of Product Margins using Activity Based Costing System: B300 1 1500 Total 1,264,200 499,200 1,763,400 Sales Costs: Direct Materials Direct Labor Machining Setups Product Sustaining Total Costs 400,300 120,500 120,868 29,820 50,300 721,788 162,500 42,600 83,616 92,400 50,300 431,416 562,800 163,100 204,484 122,220 100,600 1,153,204 Product Margin 542,412 67,784 610,196

Total Answer to Part 3. B300 % of Total Amount | Amount T500 % of Total Amount Amount Amount Traditional Cost System: Direct Materials Direct Labor Manufacturing Overhead Total Costs assigned to Products 400,300 120,500 360,247 881,047 71.1% 73.9% 73.9% 162,500 42,600 127,357 332,457 28.9% 26.1% 26.1% 562,800 163,100 487,604 1,213,504 B300 T500 Total % of Total % of Total Amount Amount Amount Amount Amount 400,300 120,500 71.13% 73.88% 162,500 42,600 28.87% 26.12% 562,800 163,100 Activity Based Costing System: Direct Costs: Direct Materials Direct Labor Indirect Costs: Supporting Direct Labor Batch Setups Product Sustaining Total Cost assigned to Products Cost not assigned to Products: Other Total Cost 120,868 29,820 50,300 721,788 59.11% 24.40% 50.00% 83,616 92,400 50,300 431,416 40.89% 75.60% 50.00% 204,484 122,220 100,600 1,153,204 60,300 1,213,504