COST ACCOUNTING.

QUESTION 1

Hi-Tek Manufacturing, Inc., makes two types of industrial component partsthe B300 and the T500. An absorption costing income statement for the most recent period is shown:

Hi-Tek Manufacturing Inc.

Income Statement

Sales $1,763,700

Cost of goods sold 1,207,330

Gross margin 556,370

Selling and administrative expenses 600,000

Net operating loss $(43,630)

Hi-Tek produced and sold 60,400 units of B300 at a price of $21 per unit and 12,700 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 T500 Total

Direct materials $400,400 $162,500 $562,900

Direct labor $120,400 $42,300 162,700

Manufacturing overhead 481,730

Cost of goods sold $1,207,330

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 $110,000 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) $199,290 90,500 62,800 153,300

Setups (setup hours) 120,540 74 220 294

Product-sustaining (number of products) 101,800 1 1 2

Other (organization-sustaining costs) 60,100 NA NA NA

Total manufacturing overhead cost $481,730

Required:

1. Compute the product margins for the B300 and T500 under the company's traditional costing system.

2. Compute the product margins for B300 and T500 under the activity-based costing system.

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.

QUESTION 2

Smoky Mountain Corporation makes two types of hiking bootsthe Xtreme and the Pathfinder. Data concerning these two product lines appear below:

Xtreme Pathfinder

Selling price per unit $115.00 $85.00

Direct materials per unit $65.40 $53.00

Direct labor per unit $16.00 $10.00

Direct labor-hours per unit 1.6DLHs 1.0DLHs

Estimated annual production and sales 32,000units 60,000units

The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:

Estimated total manufacturing overhead $1,779,200

Estimated total direct labor-hours 111,200DLHs

Required:

1. Compute the product margins for the Xtreme and the Pathfinder products under the company's traditional costing system.

2. The company is considering replacing its traditional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools (the Other cost pool includes organization-sustaining costs and idle capacity costs):

Estimated Expected Activity

Activities and Activity Measures Overhead Cost Xtreme Pathfinder Total

Supporting direct labor (direct labor-hours) $556,000 51,200 60,000 111,200

Batch setups (setups) 770,000 430 340 770

Product sustaining (number of products) 400,000 1 1 2

Other 53,200 NA NA NA

Total manufacturing overhead cost $1,779,200

Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system.

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.