Problem 7-16 Comparing Traditional and Activity-Based Product Margins [LO7-1, LO
ID: 2556815 • 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 produced and sold 60,200 units of B300 at a price of $21 per unit and 12,600 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:
The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $53,000 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:
Required:
1. Compute the product margins for the B300 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 quantitative comparison of the traditional and activity-based cost assignments.
Hi-Tek Manufacturing Inc.Income Statement Sales $ 1,755,600 Cost of goods sold 1,248,706 Gross margin 506,894 Selling and administrative expenses 590,000 Net operating loss $ (83,106 )
Explanation / Answer
Answer 1. Calculation of Product Margin Under Traditional Costing System B300 T500 Total Sales in Units 60,200 12,600 SP per Unit 21 39 Sales in $ 1,264,200 491,400 1,755,600 Less: Costs Direct Materials 400,200 162,300 562,500 Direct Labor 120,900 42,600 163,500 Manufacturing Overhead 386,515 136,191 522,706 Total Maufacturing Cost 907,615 341,091 1,248,706 Product Margin 356,585 150,309 506,894 Predetermined Overhead Rate = $522,706 (Total MOH) / $163,500 (Total Direct Labour $) Predetermined Overhead Rate = 319.70% of DLC (Approx.) Answer 2. Calculation of Activity Rate Total cost Allocation Base Allocation Rate Machining 204,886 152,900 Mach. Hrs 1.34 per mach. Hr Setups 157,520 358 Setup Hrs 440.00 per setup hr. Product Sustaining 100,000 2 Production 50,000.00 per product Other 60,300 NA NA Total Overhead 522,706 Assigning Overhead Cost to Product Model Using ABC Method Activity Based Overhead Rate B300 T500 Cost Driver Incurred OH Allocated Cost Driver Incurred OH Allocated Machining 1.34 per mach. Hr 90,200 Mach. Hrs 120,868.00 62,700 Mach. Hrs 84,018.00 Setups 440.00 per setup hr. 78 Setup Hrs 34,320.00 280 Setup Hrs 123,200.00 Product Sustaining 50,000.00 per product 1 Production 50,000.00 1 Production 50,000.00 Total Overhead 205,188 257,218 Calculation of Product Margin Under ABC Costing B300 T500 Total Sales in Units 60,200 12,600 SP per Unit 21 39 Sales in $ 1,264,200 491,400 1,755,600 Less: Costs Direct Materials 400,200 162,300 562,500 Direct Labor 120,900 42,600 163,500 Advertising Costs 53,000 102,000 155,000 Indirect Costs: Machining 120,868 84,018 204,886 Setups 34,320 123,200 157,520 Product Sustaining 50,000 50,000 100,000 Total costs assigned to products 779,288 564,118 1,343,406 Product Margin 484,912 (72,718) 412,194 Answer 3. B300 T500 Total Amount Amount % of Total amount Amount % of Total amount Traditional Cost System Direct Materials 400,200 71.15% 162,300 28.85% 562,500 Direct Labor 120,900 73.94% 42,600 26.06% 163,500 Manufacturing Overhead 386,515 73.94% 136,191 26.06% 522,706 Total cost assigned to products 907,615 72.68% 341,091 27.32% 1,248,706 Selling & Admn. Exp. 590,000 Total Costs 1,838,706 B300 T500 Total Amount Amount % of Total amount Amount % of Total amount Activity Based Costing system Direct Materials 400,200 71.15% 162,300 28.85% 562,500 Direct Labor 120,900 73.94% 42,600 26.06% 163,500 Advertising Costs 53,000 34.19% 102,000 65.81% 155,000 Indirect Costs: Machining 120,868 58.99% 84,018 41.01% 204,886 Setups 34,320 21.79% 123,200 78.21% 157,520 Product Sustaining 50,000 50.00% 50,000 50.00% 100,000 Total costs assigned to products 779,288 58.01% 564,118 41.99% 1,343,406 Costs not assigned to products Selling & Admn. Exp. 435,000 Other Costs 60,300 Total Costs 1,838,706