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	$	1,704,000
Cost of goods sold		1,218,840
Gross margin		485,160
Selling and administrative expenses		560,000
Net operating loss	$	(74,840	)

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 $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	$	400,800	$	162,500	$	563,300
Direct labor	$	120,800	$	42,300		163,100
Manufacturing overhead						492,440
Cost of goods sold					$	1,218,840

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 $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)	$	201,960		90,900	62,100	153,000
Setups (setup hours)		128,480		72	220	292
Product-sustaining (number of products)		101,400		1	1	2
Other (organization-sustaining costs)		60,600		NA	NA	NA
Total manufacturing overhead cost	$	492,440

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
	492440/163100
	3.019252
	product margin using traditional appraoch
					B300	T500	total
	sales				1204000	500000	1704000
	less:Expenses
	direct materials				400800	162500	563300
	direct labor				120800	42300	163100
	manufacturing OH applied @3.02				364726	127714	492440
	total manufacturing cost				886326	332514	1218840
	product margin				317674	167486	485160	answer
2)	ABC activity based
	Activity rates
					(a)	(b)	c=a/b
	Activity cost pools				total cost	total	Activity rate
						activity
	machining				201,960	153,000	1.32	per machine hour
	Setups				128,480	292	440	per setup hour
	product sustaining				101,400	2	50700	per product
	product margin under ABC accounting
					B300	T500	total
	sales				1204000	500000	1704000
	less:Expenses
	direct materials				400800	162500	563300
	direct labor				120800	42300	163100
	Advertising expense				57,000	102,000	159000
	manufacturing overhead assigned
	machining				119988	81972	201960
	Setups				31680	96800	128480
	product sustaining				50700	50700	101400
	total cost				780,968	536,272	1317240
	product margin				423032	-36272	386760
	Traditional cost system			B        300		T -500
3)					% of total		% of total	Total
				amount	amount	amount	amount	amount
	Traditional cost system
	Direct materials			400800	71.2%	162500	28.8%	563300
	direct labor			120800	74.1%	42300	25.9%	163100
	manufacturing overhead			364726	74.1%	127714	25.9%	492440
	total cost assigned to products							1218840
	selling & administrative cost							560,000
	total cost.							1778840
				B        300		T -500
					% of total		% of total	Total
				amount	amount	amount	amount	amount
	ABC based costing system
	Direct costs
	direct materials			400800	71.2%	162500	28.8%	563300
	direct labor			120800	74.1%	42300	25.9%	163100
	Advertising expense			57,000	35.8%	102,000	64.2%	159000
	Indirect costs:
	machining			119988	59.4%	81972	40.6%	201960
	Setups			31680	24.7%	96800	75.3%	128480
	product sustaining			50700	50.0%	50700	50.0%	101400
	total cost assigned to products			780968		536272		1317240
	cost not assigned to products
	Selling & administrative expense							401,000
	other							60,600
	total cost.							1778840