Hi-Tek Manufacturing, Incorporated, 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 Incorporated Income Statement Sales $ 1,716,000 Cost of goods sold 1,219,091 Gross margin 496,909 Selling and administrative expenses 600,000 Net operating loss $ (103,091) Hi-Tek produced and sold 60,400 units of B300 at a price of $20 per unit and 12,700 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: B300 T500 Total Direct materials $ 401,000 $ 162,300 $ 563,300 Direct labor $ 120,500 $ 42,700 163,200 Manufacturing overhead 492,591 Cost of goods sold $ 1,219,091 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $56,000 and $108,000 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: Activity Cost Pool (and Activity Measure) Manufacturing Overhead Activity B300 T500 Total Machining (machine-hours) $ 203,091 90,500 62,200 152,700 Setups (setup hours) 126,900 72 210 282 Product-sustaining (number of products) 101,600 1 1 2 Other (organization-sustaining costs) 61,000 NA NA NA Total manufacturing overhead cost $ 492,591 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, Incorporated, 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 Incorporated Income Statement |
|
Sales | $ 1,716,000 |
---|---|
Cost of goods sold | 1,219,091 |
Gross margin | 496,909 |
Selling and administrative expenses | 600,000 |
Net operating loss | $ (103,091) |
Hi-Tek produced and sold 60,400 units of B300 at a price of $20 per unit and 12,700 units of T500 at a price of $40 per unit. The company’s traditional cost system allocates manufacturing
B300 | T500 | Total | |
---|---|---|---|
Direct materials | $ 401,000 | $ 162,300 | $ 563,300 |
Direct labor | $ 120,500 | $ 42,700 | 163,200 |
Manufacturing overhead | 492,591 | ||
Cost of goods sold | $ 1,219,091 |
The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $56,000 and $108,000 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:
Activity Cost Pool (and Activity Measure) | Manufacturing Overhead | Activity | ||
---|---|---|---|---|
B300 | T500 | Total | ||
Machining (machine-hours) | $ 203,091 | 90,500 | 62,200 | 152,700 |
Setups (setup hours) | 126,900 | 72 | 210 | 282 |
Product-sustaining (number of products) | 101,600 | 1 | 1 | 2 |
Other (organization-sustaining costs) | 61,000 | NA | NA | NA |
Total |
$ 492,591 |
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.
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In step 3, how did you get the advertising expenses? Where did you get them from the problem?