Problem 7-16 Comparing Traditional and Activity-Based Product Margins [L07-1, LO

Question

Problem 7-16 Comparing Traditional and Activity-Based Product Margins [L07-1, LO7-3, Lo7-4, Lo7-5] Hi-Tek Manufacturing, Inc., makes two types of industrial component parts-the 8300 and the T500 An absorption costing income statement for the most recent period is shown: Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating loss 511,400 HTek produced and sold 60,400 units of B300 at a price of $20 per unit and 12.600 units of T500 at a price of $40 per unit The allocates manufacturing overhead to products using a plantwide overhead rate and direct labor relating to the company's two product lines is shown below dollars as the allocation base. Additional Direct laber Manufacturing overhead Cost of goods sold $ 563, 200 163,600 s 120,800 42,800 s 1,200,600 The company team concluded that $55,000 and $100,000 of the company's respectively. Thh distributed the company's manufacturing has created an activity-based costing system to evaluate the profitability of its products. Hi- Tek's ABC implementation expenses could be directly traced to B300 and T500, of the selling and administrative expenses was organiation-sustaining in nature. The ABC team also overhead to four activities as shown below s 198,9ee 112,800 101,6e0 Setups (setup hours) Other Total manufacturing overhead cost 22053, costs) 1. Compute the product margins for the 8300 and T500 under the company's traditional costing system. 2. Compute the product margins for B300 and T500 under the activity-based costing system 3. Prepare a e comparison of the traditional and activity-based cost assignments

Explanation / Answer

Part 1)

The product margin under traditional costing system is calculated as below:

Predetermined Manufacturing Overhead Rate = Estimated Manufacturing Overheads/Estimated Direct Labor Hours = 473,800/163,600 = $2.90

____

Notes:

While the predetermined overhead rate is $2.90/-, I have used actual predetermined overhead rate while calculating the gross margin under traditional costing.

____

Part 2)

Step 1: Calculate Activity Rates

The activity rates are determined as below

_____

Step 2: Calculate Product Margins

The product margins are calculated as below:

____

Part 3)

The quantitative comparison is prepared as below:

B300 T500 Total Sales 1,208,000 (60,400*20) 504,000 (12,600*40) 1,712,000 Direct Materials 400,300 162,900 563,200 Direct Labor 120,800 42,800 163,600 Manufacturing Overhead Applied 349,847 (120,800*2.8961) 123,953 (42,800*2.8961) 473,800 Total Manufacturing Costs 870,947 329,653 1,200,600 Product Margin (Traditional Costing System) $337,053 $174,347 $511,400

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---