Question
Hi-Tek Manufacturing, Incorporated, makes two industrial component parts—B300 and T500. An absorption costing income statement for the most recent period is shown below:
Hi-Tek Manufacturing, Incorporated
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 total: 608,000
Cost of goods sold total: $ 1,600,000
The company 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 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) $ 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:
Compute the product margins for B300 and T500 under the company’s traditional costing system.
Compute the product margins for B300 and T500 under the activity-based costing system.
Prepare a quantitative comparison of the traditional and activity-based cost assignments.
Hi-Tek Manufacturing, Incorporated
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 total: 608,000
Cost of goods sold total: $ 1,600,000
The company 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 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) $ 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:
Compute the product margins for B300 and T500 under the company’s traditional costing system.
Compute the product margins for B300 and T500 under the activity-based costing system.
Prepare a quantitative comparison of the traditional and activity-based cost assignments.
Answers
Answered by
GPT-4o mini
To compute the product margins for B300 and T500, we will perform the following steps for both the traditional costing system and the activity-based costing (ABC) system.
### Step 1: Compute Product Margins Under Traditional Costing System
**Total Direct Costs:**
1. Calculate direct materials and direct labor costs for both products.
**B300:**
- Direct Materials: $436,300
- Direct Labor: $200,000
- Total Direct Costs for B300 = $436,300 + $200,000 = $636,300
**T500:**
- Direct Materials: $251,700
- Direct Labor: $104,000
- Total Direct Costs for T500 = $251,700 + $104,000 = $355,700
**Total Manufacturing Overhead:**
- Total Manufacturing Overhead = $608,000
**Total Direct Costs and Allocated Overhead:**
- Overhead Allocation Rate (using Direct Labor Dollars as base):
- Total Direct Labor Cost = $304,000
- Overhead Rate = Total Manufacturing Overhead / Total Direct Labor Cost = $608,000 / $304,000 = 2.00
**Overhead Assigned:**
- B300 Overhead = 2.00 * $200,000 = $400,000
- T500 Overhead = 2.00 * $104,000 = $208,000
**Cost of Goods Sold:**
- COGS for B300 = $636,300 + $400,000 = $1,036,300
- COGS for T500 = $355,700 + $208,000 = $563,700
**Sales:**
- Sales for B300 = 70,000 units * $20 = $1,400,000
- Sales for T500 = 17,500 units * $40 = $700,000
**Product Margin Calculation:**
- Product Margin for B300 = Sales - COGS = $1,400,000 - $1,036,300 = $363,700
- Product Margin for T500 = Sales - COGS = $700,000 - $563,700 = $136,300
### Step 2: Compute Product Margins Under Activity-Based Costing (ABC)
**Direct Costs:**
- The direct material and direct labor costs remain the same.
**Allocate Manufacturing Overhead:**
- Now we will use the ABC method to allocate overhead costs.
1. **Machining Overhead:**
- B300: $213,500 × (90,000 machine-hours / 152,500 total machine-hours) = $126,260 (for B300)
- T500: $213,500 × (62,500 machine-hours / 152,500 total machine-hours) = $87,240 (for T500)
2. **Setups Overhead:**
- B300: $157,500 × (75 setup hours / 375 total setup hours) = $31,500
- T500: $157,500 × (300 setup hours / 375 total setup hours) = $126,000
3. **Product Sustaining Overhead:**
- B300: $120,000 / 2 = $60,000
- T500: $120,000 / 2 = $60,000
4. **Total Overhead Assignment:**
- B300 = $126,260 + $31,500 + $60,000 = $217,760
- T500 = $87,240 + $126,000 + $60,000 = $273,240
**Cost of Goods Sold Using ABC:**
- B300 COGS = $636,300 + $217,760 = $854,060
- T500 COGS = $355,700 + $273,240 = $628,940
**Sales:**
- Remains the same as calculated earlier.
**Product Margin Calculation:**
- Product Margin for B300 = Sales - COGS = $1,400,000 - $854,060 = $545,940
- Product Margin for T500 = Sales - COGS = $700,000 - $628,940 = $71,060
### Summary of Findings:
**Traditional Costing:**
- B300 Product Margin: $363,700
- T500 Product Margin: $136,300
**Activity-Based Costing:**
- B300 Product Margin: $545,940
- T500 Product Margin: $71,060
### Quantitative Comparison:
| Product | Traditional Costing Margin | ABC Costing Margin | Difference |
|---------|---------------------------|--------------------|---------------|
| B300 | $363,700 | $545,940 | $182,240 (more for ABC) |
| T500 | $136,300 | $71,060 | -$65,240 (less for ABC) |
The ABC method provided a higher product margin for B300 while decreasing the product margin for T500. This illustrates how different costing methods can significantly impact reported profitability of product lines.
### Step 1: Compute Product Margins Under Traditional Costing System
**Total Direct Costs:**
1. Calculate direct materials and direct labor costs for both products.
**B300:**
- Direct Materials: $436,300
- Direct Labor: $200,000
- Total Direct Costs for B300 = $436,300 + $200,000 = $636,300
**T500:**
- Direct Materials: $251,700
- Direct Labor: $104,000
- Total Direct Costs for T500 = $251,700 + $104,000 = $355,700
**Total Manufacturing Overhead:**
- Total Manufacturing Overhead = $608,000
**Total Direct Costs and Allocated Overhead:**
- Overhead Allocation Rate (using Direct Labor Dollars as base):
- Total Direct Labor Cost = $304,000
- Overhead Rate = Total Manufacturing Overhead / Total Direct Labor Cost = $608,000 / $304,000 = 2.00
**Overhead Assigned:**
- B300 Overhead = 2.00 * $200,000 = $400,000
- T500 Overhead = 2.00 * $104,000 = $208,000
**Cost of Goods Sold:**
- COGS for B300 = $636,300 + $400,000 = $1,036,300
- COGS for T500 = $355,700 + $208,000 = $563,700
**Sales:**
- Sales for B300 = 70,000 units * $20 = $1,400,000
- Sales for T500 = 17,500 units * $40 = $700,000
**Product Margin Calculation:**
- Product Margin for B300 = Sales - COGS = $1,400,000 - $1,036,300 = $363,700
- Product Margin for T500 = Sales - COGS = $700,000 - $563,700 = $136,300
### Step 2: Compute Product Margins Under Activity-Based Costing (ABC)
**Direct Costs:**
- The direct material and direct labor costs remain the same.
**Allocate Manufacturing Overhead:**
- Now we will use the ABC method to allocate overhead costs.
1. **Machining Overhead:**
- B300: $213,500 × (90,000 machine-hours / 152,500 total machine-hours) = $126,260 (for B300)
- T500: $213,500 × (62,500 machine-hours / 152,500 total machine-hours) = $87,240 (for T500)
2. **Setups Overhead:**
- B300: $157,500 × (75 setup hours / 375 total setup hours) = $31,500
- T500: $157,500 × (300 setup hours / 375 total setup hours) = $126,000
3. **Product Sustaining Overhead:**
- B300: $120,000 / 2 = $60,000
- T500: $120,000 / 2 = $60,000
4. **Total Overhead Assignment:**
- B300 = $126,260 + $31,500 + $60,000 = $217,760
- T500 = $87,240 + $126,000 + $60,000 = $273,240
**Cost of Goods Sold Using ABC:**
- B300 COGS = $636,300 + $217,760 = $854,060
- T500 COGS = $355,700 + $273,240 = $628,940
**Sales:**
- Remains the same as calculated earlier.
**Product Margin Calculation:**
- Product Margin for B300 = Sales - COGS = $1,400,000 - $854,060 = $545,940
- Product Margin for T500 = Sales - COGS = $700,000 - $628,940 = $71,060
### Summary of Findings:
**Traditional Costing:**
- B300 Product Margin: $363,700
- T500 Product Margin: $136,300
**Activity-Based Costing:**
- B300 Product Margin: $545,940
- T500 Product Margin: $71,060
### Quantitative Comparison:
| Product | Traditional Costing Margin | ABC Costing Margin | Difference |
|---------|---------------------------|--------------------|---------------|
| B300 | $363,700 | $545,940 | $182,240 (more for ABC) |
| T500 | $136,300 | $71,060 | -$65,240 (less for ABC) |
The ABC method provided a higher product margin for B300 while decreasing the product margin for T500. This illustrates how different costing methods can significantly impact reported profitability of product lines.