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 | $ 1,759,200 |
Cost of goods sold | 1,235,292 |
Gross margin | 523,908 |
Selling and administrative expenses | 640,000 |
Net operating loss | $ (116,092) |
Hi-Tek produced and sold 60,000 units of B300 at a price of $21 per unit and 12,800 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 | $ 400,500 | $ 162,700 | $ 563,200 |
Direct labor | $ 120,900 | $ 42,200 | 163,100 |
Manufacturing overhead | 508,992 | ||
Cost of goods sold | $ 1,235,292 |
The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Teks ABC implementation team concluded that $51,000 and $106,000 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) | $ 202,692 | 90,100 | 62,300 | 152,400 |
Setups (setup hours) | 146,200 | 70 | 270 | 340 |
Product-sustaining (number of products) | 100,000 | 1 | 1 | 2 |
Other (organization-sustaining costs) | 60,100 | NA | NA | NA |
Total manufacturing overhead cost | $ 508,992 |
Required:
1. Compute the product margins for the B300 and T500 under the companys 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.
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