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 $ 1,751,400 1,206,088 545, 312 630,000 $ (84,688) Hi-Tek produced and sold 60,000 units of B300 at a price of $21 per unit and 12,600 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 $ 400,500 $ 120,100 T500 $ 162,200 $ 42,100 Direct materials Direct labor Manufacturing overhead Cost of goods sold Total $ 562,700 162,200 481, 188 $ 1,206,088 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $52,000 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 Overhead $ 204, 288 114,800 101,400 60,700 $ 481,188 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 90,900 62,700 153,600 70 210 1 2 NA NA NA 280

Answer 1

Answers 1 Product Margin under Traditional Costing B300 Product Margin 382703 2 Product Margin under Activity Based costing B300 Product Margin 487103 T500 162063 Total 544766 T500 -41091 Total 446012

3. Quantitative Comparision of the Traditional and Activity Based Cost Assignments Quantitative comparsion of the Traditional Cost B300 T 500 Total 562700 162200 481734 1206634 630000 1836634 Total Traditional Costing System Amount % Amount % Direct Material 400500 71.2% 162200 28.8% DirectLabor 120100 74.0% 42100 26.0% Manufacturing Overheads 356697 74.0% 125037 26.0% Total Cost Assigned to Products 877297 329337 Selling and Administrative Expenses Total Cost Quantitative Comparison of Acticity Based Cost Assignments B300 T500 Activty Based Costing System Amount % Amount | % Direct Cost Direct Material 400500 71.2% 162200 28.8% Direct Labor 120100 74.0% 42100 26.0% Advertisements (Traced) 52000 32.5% 108000 67.5% Indirect Cost Machining 120897 59.2% 83391 40.8% Batch setup 28700 25.0% 86100 75.0% Prodcut Sustainind 50700 50.0% 50700150.0% Total Cost Assigned to Products 772897 532491 Cost Not asigned to the Products Selling and Administrative Expenses Others Total Cost 562700 162200 160000 204288 114800 101400 1305388 470000 60700 1775388

211 Г Working Notes B300 T500 Total Selling Price 39 Direct Material 400500 1 62200 562700 Direct Labor 120100 42100 162200 Production in Units 60000 12600 72600 Manufacturing Overheads 481188 Advertisements (Traced) 52000 1080001 Selling and Administrative Expenses 630000 Maufacturing OH 481 1881 Estimated Labor Dollars 162200 Predetermined Overhead Rate 2.97 481188/162200 ІМон Activity B300 T 500 Total Machining 204288 90900 62700 153600 Setups 114800 70 210 280 Prodcut sustaining 101400 1 1 Others 607001 481188 Traditional Costing System B300 T500 Total sales 1260000 491400 1751400 Direct Material 400500 162200 562700 Direct Labor 1201001 42100 162200 Manufacturing Overheads 356697 125037 481734 Total Manufacturing Cost 877297 3293371 1206634 Product Margin 382703 1620631 544766

Base Activity Rate 153600 1.33 280 410.00 - 2 50700 Determination of Activity Rate Activty Pool Estimated OH Machining 204288 Batch setup 114800 Prodcut Sustaining 101400 Activity Based Costing System B300 sales 1260000 Direct Material 400500 Direct Labor 120100 Advertisements (Traced) 52000 Matching Activity *Rate) 120897 Batch Setup (Activity Rate 28700 Prodcut Sustaining 507001 Total Cost 772897 Product Margin 487103 T500 Total 491400 1751400 162200562700 421001 162200 108000 160000 83391 204288 86100 114800 50700 101400 532491 1305388 -41091 446012