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	$	1,710,000
Cost of goods sold		1,213,984
Gross margin		496,016
Selling and administrative expenses		630,000
Net operating loss	$	(133,984	)

Hi-Tek produced and sold 60,300 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	$	400,300	$	162,200	$	562,500
Direct labor	$	120,400	$	42,600		163,000
Manufacturing overhead						488,484
Cost of goods sold					$	1,213,984

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $57,000 and $104,000 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)	$	204,484		90,200	62,400	152,600
Setups (setup hours)		123,200		78	230	308
Product-sustaining (number of products)		100,200		1	1	2
Other (organization-sustaining costs)		60,600		NA	NA	NA
Total manufacturing overhead cost	$	488,484

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)	predetermined overhead rate
	total estimated manufacturing overhead/total estimated direct labor dollars
	488484/163000
	2.996834
	product margin using traditional appraoch
					B300	T500	total
	sales				1206000	504000	1710000
	less:Expenses
	direct materials				400300	162200	562500
	direct labor				120400	42600	163000
	manufacturing OH applied @3.09				360819	127665	488484
	total manufacturing cost				881519	332465	1213984
	product margin				324481	171535	496016	answer
2)	ABC activity based
	Activity rates
					(a)	(b)	c=a/b
	Activity cost pools				total cost	total	Activity rate
						activity
	machining				204,484	152,600	1.34	per machine hour
	Setups				123,200	308	400	per setup hour
	product sustaining				100,200	2	50100	per product
	product margin under ABC accounting
					B300	T500	total
	sales				1206000	504000	1710000
	less:Expenses
	direct materials				400300	162200	562500
	direct labor				120400	42600	163000
	Advertising expense				57,000	104,000	161000
	manufacturing overhead assigned
	machining				120868	83616	204484
	Setups				31200	92000	123200
	product sustaining				50100	50100	100200
	total cost				779,868	534,516	1314384
	product margin				426132	-30516	395616
	Traditional cost system			B        300		T -500
3)					% of total		% of total	Total
				amount	amount	amount	amount	amount
	Traditional cost system
	Direct materials			400300	71.2%	162200	28.8%	562500
	direct labor			120400	73.9%	42600	26.1%	163000
	manufacturing overhead			360819	73.9%	127665	26.1%	488484
	total cost assigned to products							1213984
	selling & administrative cost							630,000
	total cost.							1843984
				B        300		T -500
					% of total		% of total	Total
				amount	amount	amount	amount	amount
	ABC based costing system
	Direct costs
	direct materials			400300	71.2%	162200	28.8%	562500
	direct labor			120400	73.9%	42600	26.1%	163000
	Advertising expense			57,000	35.4%	104,000	64.6%	161000
	Indirect costs:
	machining			120868	59.1%	83616	40.9%	204484
	Setups			31200	25.3%	92000	74.7%	123200
	product sustaining			50100	50.0%	50100	50.0%	100200
	total cost assigned to products			779868		534516		1314384
	cost not assigned to products
	Selling & administrative expense							469,000
	other							60,600
	total cost.							1843984