Question
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
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 below:
Hi-Tek Manufacturing Inc. Income Statement | ||
Sales | $2,100,000 | |
Cost of goods sold | 1,600,000 | |
Gross margin | 500,000 | |
Sales and administrative expenses | 550,000 | |
Net operating loss | ($50,000) |
Hi-Tek produced and sold 70,000 units of B300 at a price of $20 per unit and 17,500 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 labour dollars as the allocation base. Additional information relating to the company's two product lines is shown below:
B300 | T500 | Total | |
Direct materials | $436,300 | $251,700 | $ 688,000 |
Direct labour | $200,000 | $104,000 | $ 304,000 |
Manufacturing overhead | $ 608,000 | ||
Cost of goods sold | $1,600,000 |
The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $50,000 and $100,000 of the company's advertising expenses could be directly traced to B300 and T500, respectively. The remainder of the selling and administrative expenses were 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 Measures) | Activity | |||
Manufacturing Overhead | B300 | T500 | Total | |
Machining (machine-hours) | $213,500 | 90,000 | 62,500 | 152,500 |
Setups (setup-hours) | 157,500 | 75 | 300 | 375 |
Product-sustaining (number of products) | 120,000 | 1 | 1 | 2 |
Other (organization-sustaining costs) | 117,000 | NA | NA | NA |
Total manufacturing overhead costs | $608,000 |
Required:
- Compute the product margins for the B300 and T500 under the company's traditional costing system.
- Compute the product margins for B300 and T500 under the activity-based costing system.
Use the following steps:
1a. Calculate overhead rate using the traditional method.(3 Marks)
1b. Calculate product margins using the traditional method.(10 Marks)
B300 | T500 | Total |
2a. Calculate the activity rate for each activity using ABC. (7 Marks)
Activity | Budgeted Cost | Driver | Rate |
2b. Compute the Product Margin each model of phone using ABC.(10 Marks)
B300 | T500 | Total |
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