Hi-Tek Manufacturing Inc. makes two types of industrial component parts the 8300
ID: 2564044 • Letter: H
Question
Hi-Tek Manufacturing Inc. makes two types of industrial component parts the 8300 and the T500. A absorption costing income statement for the most recent period is shown below Hi-Tek Manufacturing Income Statement Sales Cost of goods sold $1,764,000 1,210,412 Gross margin Selling and administrative expenses 553,588 560,000 Net operating loss $ (6,412) Hi-Tek produced and sold 60,000 units of 8300 at a price of $21 per unit and 12,600 units of T500 at a price of $40 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 8300 T500 Total Direct materials Direct labor Manufacturing overhead S 400,500 162,300 $ 562,800 120,000 42.100 162,100 485,512 Cost of goods sold S 1,210,412 The company has created an activity-based costing system to evaluate the profitability of its products. Hi- Tek's ABC implementation team concluded that $59,000 and $110,000 of the company's advertising expenses could be directly traced to B300 and T500 , respectively. The remainder of the selling and 0 au rsExplanation / Answer
Requirement 1 –
Compute the product margins for the B300 and T500 under the company’s traditional costing system.
Solution –
Calculation of Plantwide overhead rate = Estimated total manufacturing overhead cost / Estimated total direct labor dollars
Plantwide overhead rate = $485,512 / $162,100 = $3 per direct labour dollar
B300
T500
Total
Sales
1,260,000
504,000
1,764,000
Direct Materials
400,500
162,300
562,800
Direct Labor
120,000
42,100
162,100
Manufacturing Overhead Applied
359,417
126,095
485,512
Total Manufacturing costs
879,917
330,495
1,210,412
Product Margin
380,083
173,505
553,588
Requirement 2 –
Compute the product margins for the B300 and T500 under the Activity based costing system.
Solution –
B300
T500
Total
Sales
1,260,000
504,000
1,764,000
Direct Materials
400,500
162,300
562,800
Direct Labor
120,000
42,100
162,100
Advertising Expense
59,000
110,000
169,000
MOH assigned (2nd stage allocation)
Machining Pool
124,476
85,836
210,312
Setup Pool
30,800
84,000
114,800
Product Sustaining
50,100
50,100
100,200
Total Costs assigned
784,876
534,336
1,319,212
Product Margin
475,124
- 30,336
444,788
Requirement 3-
Prepare a quantitative comparison of the traditional and activity-based cost assignments.
Solution –
B300
T500
Total
Amount
% of Amount
Amount
% of Amount
Traditional Costing System -
Direct Materials
400,500
71.16%
162,300
28.84%
562,800
Direct Labor
120,000
74.03%
42,100
25.97%
162,100
Manufacturing Overhead
359,417
74.03%
126,095
25.97%
485,512
Total cost assigned to products
879,917
330,495
1,210,412
Selling and administrative
560,000
Total Cost
1,770,412
Activity-Based Costing System
Direct Costs -
Direct Materials
400,500
71.16%
162,300
28.84%
562,800
Direct Labor
120,000
74.03%
42,100
25.97%
162,100
Advertising Expense
59,000
34.91%
110,000
65.09%
169,000
Indirect Costs -
Machining
124,476
59.19%
85,836
40.81%
210,312
Setups
30,800
26.83%
84,000
73.17%
114,800
Product sustaining
50,100
50.00%
50,100
50.00%
100,200
Total cost assigned to products
784,876
534,336
1,319,212
Cost not assigned -
Selling and administrative
391,000
Other
60,200
Total Cost
1,770,412
B300
T500
Total
Sales
1,260,000
504,000
1,764,000
Direct Materials
400,500
162,300
562,800
Direct Labor
120,000
42,100
162,100
Manufacturing Overhead Applied
359,417
126,095
485,512
Total Manufacturing costs
879,917
330,495
1,210,412
Product Margin
380,083
173,505
553,588