Problem 7-16 Comparing Traditional and Activity-Based Product Margins [LO7-1, LO
ID: 2539229 • Letter: P
Question
Problem 7-16 Comparing Traditional and Activity-Based Product Margins [LO7-1, LO7-3, LO7-4, LO7-5] Hi-Tek Manufacturing, Inc., makes two types of industrial component parts-the B300 and the T500. An absorption costing income statement for the most recent period is shown Hi-Tek Manufacturing Inc. Income Statement Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating loss s 1,701,200 1,247,755 453,445 560,000 $ (106,555) Hi-Tek produced and sold 60,100 units of B300 at a price of $20 per unit and 12,800 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 Direct labor Manufacturing overhead Cost of goods sold $ 401,000 162,100$ 563,100 163,600 521,05!5 1,247,755 $ 120,800 42,800 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $55,000 and $102,000 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: Activit T500 Activity Cost Pool (and Activity Measure) Machining (machine-hours) Setups (setup hours) Product-sustaining (number of products) Other (organization-sustaining costs) Total manufacturing overhead cost Manufacturing Overhead s 210,295 150,060 100,000 B300 Total 90,500 63,000 153,500 366 76 290 60,700 NA NA NA $ 521,055Explanation / Answer
B300 T500 Units Sold 60100 12800 Rate per unit $ 20.00 $ 39.00 1) Product margins under the company’s traditional costing system B300 T500 Total Sales (units sold*rate per unit) $ 1,202,000.00 $ 499,200.00 $ 1,701,200.00 Less: Direct Materials 401000 162100 $ 563,100.00 Direct Labour 120800 42800 $ 163,600.00 Manufacturing Overhead 384740 $ 136,315 $ 521,055.00 (521055/163600*120800) (521055/163600*42800) Margin $ 295,460.12 $ 157,984.88 $ 453,445.00 Less: Selling and administrative Expenses $ 560,000.00 Net operating Profit/(loss) $ (106,555.00) Note: Direct Labour as allocation base Product wise Manufacturing Overhead=Total Overhead/Total Labour Cost*Product labour Cost 2) Product margins for B300 and T500 under the activity-based costing system. B300 T500 Total Sales (units sold*rate per unit) $ 1,202,000.00 $ 499,200.00 $ 1,701,200.00 Less: Direct Materials $ 401,000.00 $ 162,100.00 $ 563,100.00 Direct Labour $ 120,800.00 $ 42,800.00 $ 163,600.00 Manufacturing Overhead Machinig 123985 $ 86,310 $ 210,295.00 Set ups 31160 $ 118,900 $ 150,060.00 Product -sustaining 50000 $ 50,000 $ 100,000.00 Other NA NA Margin $ 475,055.00 $ 39,090.00 $ 514,145.00 Less: Selling and administrative Expenses Advertisement $ 55,000.00 $ 102,000.00 $ 157,000.00 Other NA NA Net operating Profit/(loss) $ 420,055.00 $ (62,910.00) $ 357,145.00 Overhead Allocation under activity based costing Manufacturing Overhead Activity Rate per activity Overhead Allocation(Rate per activity*activity) B300 T500 Total (Manufacturing Overhead/Total Activity) B300 (Rate*activity) T500(Rate*Kactivity)) Machining(Machine Hours) 210295 90500 63000 153500 1.37 123985 86310 Set Ups (Set up Hours) 150060 76 290 366 410.00 31160 118900 Product -sustaining (Number of products) 100000 1 1 2 50000.00 50000 50000 Other (Organisation sustaining cost) 60700 NA NA NA NA NA NA 3 B300 T500 Total Amount % of total amount Amount % of total amount Amount Traditional cost System Direct Materials 401000 71% 162100 29% $ 563,100.00 Direct Labour 120800 74% 42800 26% $ 163,600.00 Manufacturing Overhead 384740 74% 136315 26% $ 521,055.00 Total cost assigned to products 906540 341215 1247755 Unassigned Cost 560000 Total cost 1807755 B300 T500 Total Amount % of total amount Amount % of total amount Amount Activity based cost system Direct Costs Direct Materials 401000 71% 162100 29% 563100 Direct Labour 120800 74% 42800 26% 163600 Advertising $ 55,000.00 35% $ 102,000.00 65% $ 157,000.00 Indirect Costs Machinig $ 123,985.00 59% $ 86,310.00 41% $ 210,295.00 Set ups $ 31,160.00 21% $ 118,900.00 79% $ 150,060.00 Product -sustaining $ 50,000.00 50% $ 50,000.00 50% $ 100,000.00 Total cost assigned to products 781945 562110 1344055 Cost not assigned to products Other (organization-sustaining costs) 60700 Selling and admin $ 403,000.00 (560000-159000) Total cost 1807755