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Hi-Tek Manufacturing, Inc., makes two types of industrialcomponent parts—the B300 and the T500. An absorption costing incomestatement for the most recent period is shown: Hi-Tek Manufacturing

Hi-Tek Manufacturing, Inc., makes two types of industrialcomponent parts—the B300 and the T500. An absorption costing incomestatement for the most recent period is shown:

Hi-Tek Manufacturing Inc.
Income Statement
Sales $ 1,704,000  
Cost of goods sold   1,222,415  
Gross margin   481,585  
Selling and administrativeexpenses   590,000  
Net operating loss $ (108,415 )
 

Hi-Tek produced and sold 60,000 units of B300 at a price of $20per unit and 12,600 units of T500 at a price of $40 per unit. Thecompany’s traditional cost system allocates manufacturing overheadto products using a plantwide overhead rate and direct labordollars as the allocation base. Additional information relating tothe company’s two product lines is shown below:

  B300 T500 Total
Direct materials $ 400,200 $ 162,800 $ 563,000
Direct labor $ 120,500 $ 42,600   163,100
Manufacturing overhead           496,315
Cost of goods sold         $ 1,222,415
 

The company has created an activity-based costing system toevaluate the profitability of its products. Hi-Tek’s ABCimplementation team concluded that $57,000 and $108,000 of thecompany’s advertising expenses could be directly traced to B300 andT500, respectively. The remainder of the selling and administrativeexpenses was organization-sustaining in nature. The ABC team alsodistributed the company’s manufacturing overhead to four activitiesas shown below:

  Manufacturing
Overhead
Activity
Activity Cost Pool (and ActivityMeasure) B300 T500 Total
Machining(machine-hours) $ 207,495   90,800 62,900 153,700
Setups (setup hours)   126,420   71 230 301
Product-sustaining (number ofproducts)   101,800   1 1 2
Other (organization-sustainingcosts)   60,600   NA NA NA
Total manufacturing overheadcost $ 496,315        
 

Required:

1. Compute the product margins for the B300 and T500 under thecompany’s traditional costing system.

2. Compute the product margins for B300 and T500 under theactivity-based costing system.

3. Prepare a quantitative comparison of the traditional andactivity-based cost assignments.

May 29 2021 View more View Less

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