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 $ 1,712,000 1,240,051 471.949 610,000 (138,051) Hi-Tek produced and sold 60,400 units of B300 at a price of $20 per unit and 12,600 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 B300T500 $ 400, 700 $ 162,900 $ 120,400 $ 42,100 Direct materials Direct labor Manufacturing overhead Coat of goods sold Total $ 563,600 162,500 513,951 $ 1,240,051 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $57,000 and $105,000 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 $ 212,531 139.920 100, 800 60, 700 $ 513,951 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 90,700 62,200 152,900 240 318

Answer 1

Answers 1 Product Margin under Traditional Costing B300 Product Margin 306436 2 Product Margin under Activity Based costing B300 Product Margin 419107 T500 165964 Total 472400 T500 -48458 Total 370649

3. Quantitative Comparision of the Traditional and Activity Based Cost Assignments Quantitative comparsion of the Traditional Cost B300 T500 Total Traditional Costing System Direct Material DirectLabor Manufacturing Overheads Total Cost Assigned to Products Selling and Administrative Expenses Total Cost Amount 400700 1204001 380464 901564 % 71.1% 74.1% 74.1% Amount 162900 42100 133036 338036 % 28.9% 25.9% 25.9% 563600 162500 513500 1239600 610000 1849600

Total 563600 162500 162000 Quantitative Comparison of Acticity Based Cost Assignments B300 T500 Activty Based Costing System Amount % Amount % Direct Cost Direct Material 400700 71.1% 162900 28.9% Direct Labor 120400 74.1% 421001 25.9% Advertisements (Traced) 57000 35.2% 105000 64.8% Indirect Cost Machining 126073 59.3% 86458 40.7% Batch setup 34320 24.5% 105600 75.5% Prodcut Sustainind 50400 50.0% 50400 50.0% Total Cost Assigned to Products 788893 552458 Cost Not asigned to the Products Selling and Administrative Expenses Others Total Cost 212531 139920 100800 1341351 448000 60700 1789351

Working Notes I B300 T500 Total Selling Price 20 4 0 Direct Material 400700 1 62900 563600 Direct Labor 120400 4 2100 162500 Production in Units 60400 12600| 730001 Manufacturing Overheads 513951 Advertisements (Traced) 57000 105000 Selling and Administrative Expenses 610000 Maufacturing OH 513951) Estimated Labor Dollars 162500 Predetermined Overhead Rate 3.16 513951/563600 MOH Activity B300 T500 Total Machining 2125311 907001 62200 152900 Setups 139920 78 2 40 318 Prodcut sustaining 100800 1 1 1 others 60700 513951 Traditional Costing System B300 T500 Total Sales 1208000 504000 1712000 Direct Material 400700 1 62900 5 63600 Direct Labor 120400 4 2100162500 Manufacturing Overheads 380464 133036 5135001 Total Manufacturing Cost 901564) 338036 1239600 Product Margin 306436 165964 472400

Determination of Activity Rate Activty Pool Machining Batch setup Prodcut Sustaining Estimated OH 212531 139920 100800 Base 152900 318 Activity Rate 1.39 440.00 50400 Activity Based Costing System sales Direct Material Direct Labor Advertisements (Traced) Machining Batch setup Prodcut Sustaining Total Cost Product Margin B300 12080001 400700 1204001 57000 126073 343201 50400 788893 419107 T500 504000 1 62900 42100 105000 86458 105600 50400 552458 -48458 Total 1 712000 563600 1625000 162000 212531 1399201 1008001 1341351 370649