Question

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:

Hi-Tek Manufacturing Inc. Income Statement
Sales	$	1,759,800
Cost of goods sold		1,231,750
Gross margin		528,050
Selling and administrative expenses		620,000
Net operating loss	$	(91,950	)

Hi-Tek produced and sold 60,400 units of B300 at a price of $21 per unit and 12,600 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:

	B300		T500		Total
Direct materials	$	400,500	$	162,200	$	562,700
Direct labor	$	120,300	$	42,200		162,500
Manufacturing overhead						506,550
Cost of goods sold					$	1,231,750

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $53,000 and $102,000 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:

	Manufacturing Overhead			Activity
Activity Cost Pool (and Activity Measure)				B300	T500	Total
Machining (machine-hours)	$	199,550		90,600	62,900	153,500
Setups (setup hours)		144,900		75	270	345
Product-sustaining (number of products)		101,800		1	1	2
Other (organization-sustaining costs)		60,300		NA	NA	NA
Total manufacturing overhead cost	$	506,550

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. Prepare a quantitative comparison of the traditional and activity-based cost assignments.

Answer 1

1)Traditional Costing Method		B300		T500
	Units	Cost per Unit	Total	Units	Cost per Unit	Total
Sales	60400	$21	$1,268,400	12600	$39	$491,400
Less:
Direct materials	60400	$6.63	$400,500	12600	$12.87	$162,200
Direct labor	60400	$1.99	$120,300	12600	$3.35	$42,200
Manufacturing Overhead (calculated below)applied @ $3.12 per direct labor-dollar		$3.12	$375,002.86		$3.12	$131,547.14
Total Manufacturing Cost		$11.74	$895,802.86		$19.34	$335,947.14
Profit Margin		$9.26	$372,597.14		$19.66	$155,452.86
Manufacturing Overhead
Predetermined overhead Rate = Estimated total manufacturing overhead cost/Estimated total direct labor dollars
Predetermined overhead Rate = $506550/$162,500	$3.12
2)Absorbtion Costing Method
Activity Cost Pools	Total Cost	Total Activity	Activity Rate
Machining (machine-hours)	$199,550	153500	$1.3
Setups (setup hours)	$144,900	345	$420
Product-sustaining (number of products)	$101,800	2	$50,900
	B300	T500
Sales	$1,268,400	$491,400
Less:
Direct materials	$400,500	$162,200
Direct labor	$120,300	$42,200
Advertising	$53,000	$102,000
Machining (machine-hours)	$117,780	$81,770
Setups (setup hours)	$31,500	$113,400
Product-sustaining (number of products)	$50,900	$50,900
Total Manufacturing Cost	$723,080	$501,570
Profit Margin	$545,320	-$10,170
3)	B300		T500		Total
Traditional Cost System	Amount	%	Amount	%
Direct materials	$400,500	71.17%	$162,200	28.83%	$562,700
Direct labor	$120,300	74.03%	$42,200	25.97%	$162,500
Manufacturing Overhead	$375,002.86	74.03%	$131,547.14	25.97%	$506,550
Total cost assigned to products	$895,802.86		$335,947.14		$1,231,750
Selling and administrative					$620,000
Total cost					$1,851,750
Absorbtion Costing System
Direct Costs
Direct materials	$400,500	71.17%	$162,200	28.83%	$562,700
Direct labor	$120,300	74.03%	$42,200	25.97%	$162,500
Advertising	$53,000	34.19%	$102,000	65.81%	$155,000
Indirect Costs
Machining (machine-hours)	$117,780	59.02%	$81,770	40.98%	$199,550
Setups (setup hours)	$31,500	21.74%	$113,400	78.26%	$144,900
Product-sustaining (number of products)	$50,900	50.00%	$50,900	50.00%	$101,800
Total cost assigned to products	$773,980		$552,470		$1,326,450
Costs not assigned to products:
Selling and administrative					$465,000
Other					$60,300
Total cost					$1,851,750