aact w k 2

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4.

 

 

 

Problem 6-16 Comparing Traditional and Activity-Based Product Margins [LO6-1, LO6-3, LO6-4, LO6-5]

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 below:

 

Hi-Tek Manufacturing Inc. Income Statement

Sales

$

1,693,400

 

Cost of goods sold

 

1,248,292

 

Gross margin

 

445,108

 

Selling and administrative expenses

 

590,000

 

Net operating loss

$

(144,892)

 

 

 

Hi-Tek  produced and sold 60,100 units of B300 at a price of $20 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:  

 

B300

T500

Total

Direct materials

$

400,700

 

 

$

162,600

 

 

$

563,300

 

Direct labor

$

120,600

 

 

$

42,500

 

 

 

163,100

 

Manufacturing overhead

 

 

 

 

 

 

 

 

 

521,892

 

Cost of goods sold

 

 

 

 

 

 

 

 

$

1,248,292

 

 

 

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $54,000 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:  

 

Manufacturing

Activity

Activity Cost Pool (and Activity Measure)

Overhead

 

 

B300

 

 

T500

 

 

Total

 

Machining (machine-hours)

$

212,392

 

 

 

90,400

 

 

62,400

 

 

152,800

 

Setups (setup hours)

 

148,500

 

 

 

70

 

 

260

 

 

330

 

Product-sustaining (number of products)

 

100,200

 

 

 

1

 

 

1

 

 

2

 

Other (organization-sustaining costs)

 

60,800

 

 

 

NA

 

 

NA

 

 

NA

 

Total manufacturing overhead cost

$

521,892

 

 

 

 

 

 

 

 

 

 

 

 

1)

 

B300

T500

Total

Product margin (Traditional Costing)

$294,801

$150,307

$445,108

2)

 

B300

T500

Total

Product margin (ABC)

$419,444

($69,536)

$349,908

3)

Traditional Costing

B300

T500

Total

Sales

$1,202,000

$491,400

$1,693,400

Direct materials

$400,700

$162,600

$563,300

Direct labor

$120,600

$42,500

$163,100

Manufacturing overhead applied

$385,899

$135,993

$521,892

Total costs assigned to products

$907,199

$341,093

$1,248,292

Selling & administrative

590,000

Total Costs

$1,838,292

ABC Costing

B300

T500

Total

Sales

$1,202,000

$700,000

$2,100,000

Direct Costs:

Direct materials

$400,700

$162,600

$563,300

Direct labor

$120,600

$42,500

$163,100

Advertising expense (traced)

$54,000

$102,000

$156,000

Indirect Costs:

Mfg. Overhead assigned

Machining pool

$125,656

$86,736

$212,392

Setup pool

$31,500

$117,000

$148,500

Product sustaining

$50,100

$50,100

$100,200

Total costs assigned

$782,556

$560,936

$1,343,492

Cost not assigned:

Selling & Administrative (Indirect)

590,000

Organizational Sustaining Costs

60,800

Total Costs

$1,994,292

Choices

· Advertising expense

· Direct labor

· Direct materials

· Machining

· Manufacturing overhead

· Other

· Product sustaining

· Selling and administrative

· Setups