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: Hi-Tek Manufacturing Inc. Income Statement Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating loss $ 1,716,000 1,227,300 488,700 590,000 $ (101,300) Hi-Tek produced and sold 60,200 units of B300 at a price of $20 per unit and 12,800 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 $ 400,900 $ 120,100 T500 $ 162,700 $ 42,900 Direct materials Direct labor Manufacturing overhead Cost of goods sold Total $ 563,600 163,000 500, 700 $ 1,227,300 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 $101,000 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 $ 209,610 130,290 100, 200 60, 600 $ 500, 700 Activity Cost Pool (and Activity Measure) Machining (machine-hours) Setups (setup hours) Product-sustaining (number of products) Other (organization-sustaining costs) Total manufacturing overhead cost Activity B300 T500 Total 90,100 62,900 153,000 230 303 1 NA NA NA 73 1

Answer 1

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Hi-Tek
Answer 1
Calculation of manufacturing overhead per unit under traditional costing	B300	T500	Total
Direct Labor cost (D)	120,100.00	42,900.00	163,000.00
Manufacturing overhead (A)			500,700.00
Manufacturing overhead per direct labor cost (C=A/D)			3.07
Allocated Manufacturing overhead (E=C*D)	368,920.67	131,779.33	500,700.00
	B300	T500	Total
Selling Price (B)	20.00	40.00
No. of units sold (F)	60,200.00	12,800.00	73,000.00
Sales (G=B*F)	1,204,000.00	512,000.00	1,716,000.00
Direct Materials	400,900.00	162,700.00	563,600.00
Direct Labor	120,100.00	42,900.00	163,000.00
Manufacturing overhead	368,920.67	131,779.33	500,700.00
Gross Margin	314,079.33	174,620.67	488,700.00
Advertising Expenses	54,000.00	101,000.00	155,000.00
Net Margin (H)	260,079.33	73,620.67	333,700.00
Product Margin (I=H/F)	4.32	5.75

Answer 2	J	K	L=J/K	M	N=M*L	O	P=L*O	Q=M+O	R=N+P
Calculation of product margin under ABC costing:				B300	T500	Total
Activities	Overhead cost	Total Activity	Activity Rate	Activity	Amount	Activity	Amount	Activity	Amount
Machining (Machine Hours)	209,610.00	153,000.00	1.37	90,100.00	123,437.00	62,900.00	86,173.00	153,000.00	209,610.00
Setups (Setups Hours)	130,290.00	303.00	430.00	73.00	31,390.00	230.00	98,900.00	303.00	130,290.00
Product Sustaining (number of products)	100,200.00	2.00	50,100.00	1.00	50,100.00	1.00	50,100.00	2.00	100,200.00
Total Overhead	440,100.00				204,927.00		235,173.00		440,100.00
Direct Materials					400,900.00		162,700.00		563,600.00
Direct Labor					120,100.00		42,900.00		163,000.00
Advertising Expenses					54,000.00		101,000.00		155,000.00
Total Cost					779,927.00		541,773.00		1,321,700.00
Sales					1,204,000.00		512,000.00		1,716,000.00
Margin (S)					424,073.00		(29,773.00)		394,300.00
Product Margin (T=S/F)					7.04		(2.33)

Answer 3	B300	T500	Total
Traditional costing	Amount	%	Amount	%	Amount	%
Direct Materials	400,900.00	45.05%	162,700.00	48.22%	563,600.00	45.92%
Direct Labor	120,100.00	13.50%	42,900.00	12.72%	163,000.00	13.28%
Manufacturing overhead	368,920.67	41.46%	131,779.33	39.06%	500,700.00	40.80%
Total cost assigned to products	889,920.67		337,379.33		1,227,300.00
Advertising Expenses					155,000.00
Total cost					1,382,300.00

Answer 3	B300	T500	Total
ABC costing	Amount	%	Amount	%	Amount	%
Direct Costs
Direct Materials	400,900.00	51.40%	162,700.00	30.03%	563,600.00	42.64%
Direct Labor	120,100.00	15.40%	42,900.00	7.92%	163,000.00	12.33%
Advertising Expenses	54,000.00	6.92%	101,000.00	18.64%	155,000.00	11.73%
Indirect Costs
Machining (Machine Hours)	123,437.00	15.83%	86,173.00	15.91%	209,610.00	15.86%
Setups (Setups Hours)	31,390.00	4.02%	98,900.00	18.25%	130,290.00	9.86%
Product Sustaining (number of products)	50,100.00	6.42%	50,100.00	9.25%	100,200.00	7.58%
Total cost assigned to products	779,927.00		541,773.00		1,321,700.00
Costs not assigned to products
Organizational sustaining costs					60,600.00
Total cost					1,382,300.00