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27 Feb 2018
PROBLEM 7-16 Comparing Traditional and Activity-Based Product Margins [LO7-1, L07-3, L07-4, 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 ............. Cost of goods sold .... Gross margin .......... Selling and administrative expenses ...... Net operating loss ..... $2,100,000 1,600,000 500,000 550,000 $ (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. Addi- tional information relating to the company's two product lines is shown below: B300T500 Total $436,300 $200,000 $251,700 $104,000 Direct materials ........ Direct labor .............. Manufacturing overhead .... Cost of goods sold ........ $ 688,000 304,000 608,000 $1,600,000 The company has created an activity-based costing system to evaluate the profitability of its prod- ucts. 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 Manufacturing Overhead B300T500 Total Activity Cost Pool (and Activity Measure) Machining (machine-hours) ...... Setups (setup hours) ... Product-sustaining (number of products) .... Other (organization-sustaining costs) .... Total manufacturing overhead cost ....... 62,500 152,500 3003 75 $213,500 157,500 120,000 117,000 $608,000 90,000 75 1 NA NA NA 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 assign- ments differ.
PROBLEM 7-16 Comparing Traditional and Activity-Based Product Margins [LO7-1, L07-3, L07-4, 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 ............. Cost of goods sold .... Gross margin .......... Selling and administrative expenses ...... Net operating loss ..... $2,100,000 1,600,000 500,000 550,000 $ (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. Addi- tional information relating to the company's two product lines is shown below: B300T500 Total $436,300 $200,000 $251,700 $104,000 Direct materials ........ Direct labor .............. Manufacturing overhead .... Cost of goods sold ........ $ 688,000 304,000 608,000 $1,600,000 The company has created an activity-based costing system to evaluate the profitability of its prod- ucts. 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 Manufacturing Overhead B300T500 Total Activity Cost Pool (and Activity Measure) Machining (machine-hours) ...... Setups (setup hours) ... Product-sustaining (number of products) .... Other (organization-sustaining costs) .... Total manufacturing overhead cost ....... 62,500 152,500 3003 75 $213,500 157,500 120,000 117,000 $608,000 90,000 75 1 NA NA NA 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 assign- ments differ.
Nelly StrackeLv2
28 Feb 2018
