Question
Hi-Tek Manufacturing, Incorporated, 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, Incorporated, 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 Incorporated Income Statement | |
---|---|
Sales | $ 1,695,400 |
Cost of goods sold | 1,238,112 |
Gross margin | 457,288 |
Selling and administrative expenses | 620,000 |
Net operating loss | $ (162,712) |
Hi-Tek produced and sold 60,200 units of B300 at a price of $20 per unit and 12,600 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 | $ 400,300 | $ 162,200 | $ 562,500 |
Direct labor | $ 120,400 | $ 42,600 | 163,000 |
Manufacturing overhead | 512,612 | ||
Cost of goods sold | $ 1,238,112 |
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:
Activity Cost Pool (and Activity Measure) | Manufacturing Overhead | Activity | ||
---|---|---|---|---|
B300 | T500 | Total | ||
Machining (machine-hours) | $ 208,352 | 90,300 | 62,900 | 153,200 |
Setups (setup hours) | 142,760 | 72 | 260 | 332 |
Product-sustaining (number of products) | 100,600 | 1 | 1 | 2 |
Other (organization-sustaining costs) | 60,900 | NA | NA | NA |
Total manufacturing overhead cost | $ 512,612 |
Required:
- Prepare a quantitative comparison of the traditional and activity-based cost assignments.
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