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:
Hi-Tek Manufacturing Inc. Income Statement | |||
Sales | $ | 1,755,900 | |
Cost of goods sold | 1,218,631 | ||
Gross margin | 537,269 | ||
Selling and administrative expenses | 550,000 | ||
Net operating loss | $ | (12,731 | ) |
Hi-Tek produced and sold 60,400 units of B300 at a price of $21 per unit and 12,500 units of T500 at a price of $39 per unit. The companys 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 companys two product lines is shown below:
B300 | T500 | Total | ||||
Direct materials | $ | 400,800 | $ | 162,600 | $ | 563,400 |
Direct labor | $ | 120,600 | $ | 42,800 | 163,400 | |
Manufacturing overhead | 491,831 | |||||
Cost of goods sold | $ | 1,218,631 | ||||
The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Teks ABC implementation team concluded that $55,000 and $102,000 of the companys 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 companys manufacturing overhead to four activities as shown below:
Manufacturing Overhead | Activity | |||||
Activity Cost Pool (and Activity Measure) | B300 | T500 | Total | |||
Machining (machine-hours) | $ | 203,091 | 90,400 | 62,300 | 152,700 | |
Setups (setup hours) | 128,040 | 71 | 220 | 291 | ||
Product-sustaining (number of products) | 100,600 | 1 | 1 | 2 | ||
Other (organization-sustaining costs) | 60,100 | NA | NA | NA | ||
Total manufacturing overhead cost | $ | 491,831 | ||||
Required:
1. Compute the product margins for the B300 and T500 under the companys traditional costing system.
B300 | T500 | Total | |
Product Margin | ? | ? | ? |
2. Compute the product margins for B300 and T500 under the activity-based costing system.
B300 | T500 | Total | |
Product Margin | ? | ? | ? |
3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.
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