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Hi-Tek Manufacturing Inc - product margin - 23 Apr, 2020

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 below:

Hi-Tek Manufacturing Inc.

Income Statement

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,100,000

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . 1,600,000

Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000

Selling and administrative expenses . . . . . . . . . 550,000

Net operating loss . . . . . . . . . . . . . . . . . . . . . . . $ (50,000 )

Hi-Tek produced and sold 70,000 units of B300 at a price of $20 per unit and 17,500 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 . . . . . . . . . . . $436,300                   $251,700              $ 688,000

Direct labor . . . . . . . . . . . . . . $200,000                    $104,000              304,000

Manufacturing overhead . . . .                                                                     608,000

Cost of goods sold . . . . . . .                                                                            $1,600,000

The company has created an activity-based costing system to evaluate the profitability of its products.

Hi-Tek's ABC implementation team concluded that $50,000 and $100,000 of the company's 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

Activity Cost Pool (and Activity Measure) Manufacturing

                                                                                                Overhead            B300      T500       Total

Machining (machine-hours) . . . . . . . . . . . . . .        $213,500            90,000 62,500 152,500

Setups (setup hours) . . . . . . . . . . . . . . . . . . .          157,500                75           300        375

Product-sustaining (number of products) . . .        . 120,000            1             1             2

Other (organization-sustaining costs) . . . . . .        117,000                NA          NA          NA

Total manufacturing overhead cost . . . . . . . .       $608,000

Required:

1. Using Exhibit 7–13 as a guide, compute the product margins for the B300 and T500 under the company's traditional costing system.

2. Using Exhibit 7–11 as a guide, compute the product margins for B300 and T500 under the activity-based costing system.

3. Using Exhibit 7–14 as a guide, prepare a quantitative comparison of the traditional and activity-based cost assignments. Explain why the traditional and activity-based cost assignments differ.



Category : Management Accounting

Search Keywords :
Hi-tek , B300 , T500 , Product , Margin , Traditional , Activity 


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Answer  - 23 Apr, 2020
Please see the excel attachment....


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