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 below:

Hi-Tek Manufacturing Inc. Income Statement
Sales	$	1,704,000
Cost of goods sold		1,218,682
Gross margin		485,318
Selling and administrative expenses		550,000
Net operating loss	$	(64,682)

Hi-Tek produced and sold 60,000 units of B300 at a price of $20 per unit and 12,600 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	$	400,000			$	162,800			$	562,800
Direct labor	$	121,000			$	42,900				163,900
Manufacturing overhead										491,982
Cost of goods sold									$	1,218,682

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $52,000 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				Activity
Activity Cost Pool (and Activity Measure)	Overhead					B300			T500			Total
Machining (machine-hours)	$	212,382				91,000			62,900			153,900
Setups (setup hours)		117,600				74			220			294
Product-sustaining (number of products)		101,200				1			1			2
Other (organization-sustaining costs)		60,800				NA			NA			NA
Total manufacturing overhead cost	$	491,982

Required

1. Compute the product margins for the B300 and T500 under the company’s traditional costing system. (Do not round your overhead rate. Round your other intermediate and final answers to the nearest whole number.)

2. Compute the product margins for B300 and T500 under the activity-based costing system. (Negative product margins should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places.)

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Do not round your overhead rate. Round your other intermediate calculations and final answers to the nearest whole number. Round your "Percentage" answer to 1 decimal place. (i.e. .1234 should be entered as 12.3))

Answer 1

1)	predetermined overhead rate
	total estimated manufacturing overhead/total estimated direct labor dollars
	491982/163900
	3.001721
	product margin using traditional appraoch
					B300	T500	total
	sales				1200000	504000	1704000
	less:Expenses
	direct materials				400000	162800	562800
	direct labor				121000	42900	163900
	manufacturing OH applied @3.09				363208	128774	491982
	total manufacturing cost				884208	334474	1218682
	product margin				315792	169526	485318	answer
2)	ABC activity based
	Activity rates
					(a)	(b)	c=a/b
	Activity cost pools				total cost	total	Activity rate
						activity
	machining				212,382	153,900	1.38	per machine hour
	Setups				117,600	294	400	per setup hour
	product sustaining				101,200	2	50600	per product
	product margin under ABC accounting
					B300	T500	total
	sales				1200000	504000	1704000
	less:Expenses
	direct materials				400000	162800	562800
	direct labor				121000	42900	163900
	Advertising expense				52,000	102,000	154000
	manufacturing overhead assigned
	machining				125580	86802	212382
	Setups				29600	88000	117600
	product sustaining				50600	50600	101200
	total cost				778,780	533,102	1311882
	product margin				421220	-29102	392118
	Traditional cost system			B        300		T -500
3)					% of total		% of total	Total
				amount	amount	amount	amount	amount
	Traditional cost system
	Direct materials			400000	71.1%	162800	28.9%	562800
	direct labor			121000	73.8%	42900	26.2%	163900
	manufacturing overhead			363208	73.8%	128774	26.2%	491982
	total cost assigned to products							1218682
	selling & administrative cost							550,000
	total cost.							1768682
				B        300		T -500
					% of total		% of total	Total
				amount	amount	amount	amount	amount
	ABC based costing system
	Direct costs
	direct materials			400000	71.1%	162800	28.9%	562800
	direct labor			121000	73.8%	42900	26.2%	163900
	Advertising expense			52,000	33.8%	102,000	66.2%	154000
	Indirect costs:
	machining			125580	59.1%	86802	40.9%	212382
	Setups			29600	25.2%	88000	74.8%	117600
	product sustaining			50600	50.0%	50600	50.0%	101200
	total cost assigned to products			778780		533102		1311882
	cost not assigned to products
	Selling & administrative expense							396,000
	other							60,800
	total cost.							1768682