Lubin School of Business ACC 204-CRN 20812 Department of Accounting Mark A Toros

Question

Lubin School of Business ACC 204-CRN 20812 Department of Accounting Mark A Torossian, CPA Hi-Tek Manufacturing, Inc, makes two types of industrial component pa An absorption costing income statement for the most recent period is shown: rts-the B300 and the T500 Hi-Tek Manufacturing Inc. Income Statement Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating loss $ 1,691,500 444.705 560,000 S (115,295) Hi-Tek produced and sold 60.200 units of B300 at a price of $20 per unit and 12.500 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 Direct materials Direct labor S 400,200 162,900563,100 163,600 $ 120,700 $ 42,900 overhead Cost of goods sold S 1,246,795 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $55,000 and $108,000 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 facturing B300 Cost Pool (and Activity Measure) B300 T500 Total S 207,495 91,000 62,700 153,700 375 Machining (machine-hours) 150,000 101,600 61,000 S 520,095 Setups (setup hours) Product-sustaining (number of products) 75 300 Other (organization-sustaining costs) NA NA NA Total manufacturing overhead cost Required: 1. Compute the product margins for the B300 and T500 under the company's traditional costing system 2 Compute the product margins for B300 and T500 under the activity-based costing system. 3. Explain why the traditional and activity based cost assignments differ

Explanation / Answer

PMOH Rate = Estimated total mfg. cost / Estimated total DL $ PMOH Rate = $520,095 / $163,600 $3 per DL$ B300 T500 Total Sales $1,204,000 $487,500 $1,691,500 Direct materials $400,200 $162,900 $563,100 Direct labor 120,700 42,900 163,600 Manufacturing overhead applied 383,713 136,382 520,095 Total manufacturing costs $904,613 $342,182 $1,246,795 Product margin (Traditional Gross Margin) $299,387 $145,318 $444,705 Note: All of the mfg. overhead costs is applied to either B300 or T500. B300 T500 Total Sales $1,204,000 $487,500 $1,691,500 Direct materials $400,200 $162,900 $563,100 Direct labor 120,700 42,900 163,600 Advertising expense 55,000 108,000 163,000 MOH assigned (2nd Stage Allocations)      Machining pool 122,850 84,645 207,495      Setup pool 30,000 120,000 150,000      Product sustaining 50,800 50,800 101,600 Total costs assigned $779,550 $569,245 $1,348,795 Product margin (ABC) $424,450 ($81,745) $342,705 Traditional Costing B300 T500 Total Sales $1,204,000 $487,500 $1,691,500 Direct materials $400,200 $162,900 $563,100 Direct labor 120,700 42,900 163,600 Manufacturing overhead applied 383,713 136,382 520,095 Total manufacturing costs $904,613 $342,182 $1,246,795 Product margin (Traditional) $299,387 $145,318 $444,705 Selling & administrative 560,000      Net operating costs ($115,295) Note: Total costs accounted for $1,806,795 ABC Costing B300 T500 Total Sales $1,204,000 $487,500 $1,691,500 Direct materials $400,200 $162,900 $563,100 Direct labor 120,700 42,900 $163,600 Advertising expense (traced) 55,000 108,000 163,000 Mfg. Overhead assigned      Machining pool 122,850 84,645 207,495      Setup pool 30,000 120,000 150,000      Product sustaining 50,800 50,800 101,600 Total costs assigned $779,550 $569,245 $1,348,795 Product margin (ABC) $424,450 ($81,745) $342,705 Selling & Administrative (Indirect) 397,000 Organizational Sustaining Costs 61,000 Net operating income ($115,295) Note: Total costs accounted for $1,806,795 Difference in Product Margins $125,063 ($227,063) First: The traditional costing system assigns all $520095 of mfg. overhead to the products. The ABC costing system does not assign $61000 of organizational-sustaining mfg. overhead costs to products. Second: The traditional system does not trace any non-manufacturing direct costs to the products. The ABC costing system traces direct advertising costs to the products ($55,000 to B300 and $108,000 to T500). Third: The traditional costing system uses one unit-level allocation base to assign mfg. overhead costs to products whereas the ABC costing system uses three different pool drivers with different consumption ratios. The traditional costing system uses one unit-level allocation base, direct labor dollars, to assign manufacturing overhead costs. B300 T500 Total      Direct labor dollars $120,700 $42,900 $163,600      Consumption ratio: 0.738 0.262 100% The ABC costing system uses three different pool drivers and different consumption ratios 1. Machining pool: Cost driver = Number of machine hours (unit-level driver) B300 T500 Total      Machine hours 91,000 62,700 153,700      Consumption ratio: 0.592 0.408 100% 2. Setups pool: Cost driver = Number of setup hours (batch-level driver) B300 T500 Total      Setup hours 75 300 375      Consumption ratio: 0.2 0.8 100% 3. Product Sustaining pool: Cost driver = Number of products (product-level driver) B300 T500 Total      # of Products 1 1 2      Consumption ratio: 0.5 0.5 100%

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