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	$	1,703,300
Cost of goods sold		1,222,248
Gross margin		481,052
Selling and administrative expenses		580,000
Net operating loss	$	(98,948	)

Hi-Tek produced and sold 60,400 units of B300 at a price of $20 per unit and 12,700 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	$	400,100	$	162,700	$	562,800
Direct labor	$	120,000	$	42,900		162,900
Manufacturing overhead						496,548
Cost of goods sold					$	1,222,248

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $54,000 and $103,000 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)	$	205,288		90,600	62,600	153,200
Setups (setup hours)		129,360		74	220	294
Product-sustaining (number of products)		101,000		1	1	2
Other (organization-sustaining costs)		60,900		NA	NA	NA
Total manufacturing overhead cost	$	496,548

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.

Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answers to 1 decimal place and and other answers to the nearest whole dollar amounts.)

	B300 T500 Total % of % of Amount Amount Amount Traditional Cost System % % % % % % Total cost assigned to products $0 $0 $0 Total cost $0 B300 T500 Total % of % of Amount Total Amount Amount Total Amount Amount Activity-Based Costing System Direct costs: % % % % % % Indirect costs: % % % % % % Total cost assigned to products $0 $0 0 Costs not assigned to products: Total cost $0

Answer 1

Answer 1
Computation of the product margins for the B300 and T500 under the company’s traditional costing system.
		B300	T500	Total
Sales		$1,208,000.00	$495,300.00	$1,703,300.00
Less : Cost of goods sold		$885,881.22	$336,366.78	$1,222,248.00
Product Margin		$322,118.78	$158,933.22	$481,052.00
Answer 2
Computation of the product margins for B300 and T500 under the activity-based costing system.
		B300	T500	Total
Sales		$1,208,000.00	$495,300.00	$1,703,300.00
Less : Cost of goods sold		$724,564.00	$436,784.00	$1,161,348.00
Less : Advertising Expenses		$54,000.00	$103,000.00	$157,000.00
Product Margin		$429,436.00	-$44,484.00	$384,952.00
Answer 3
		B300		T500		Total
			% of		% of
		Amount		Amount		Amount
	Traditional Cost System
	Direct Materials	$400,100.00	32.7%	$162,700.00	13.3%	$562,800.00
	Direct Labor	$120,000.00	9.8%	$42,900.00	3.5%	$162,900.00
	Manufacturing Overhead	$365,781.22	29.9%	$130,766.78	10.7%	$496,548.00
	Total cost assigned to products	$885,881.22	72.5%	$336,366.78	27.5%	$1,222,248.00
	Total cost	$885,881.22		$336,366.78		$1,222,248.00
		B300		T500		Total
			% of		% of
		Amount	Total Amount	Amount	Total Amount	Amount
	Activity-Based Costing System
	Direct costs:
	Direct Materials	$400,100.00	32.7%	$162,700.00	13.3%	$562,800.00
	Direct Labor	$120,000.00	9.8%	$42,900.00	3.5%	$162,900.00
	Indirect costs:
	Machining	$121,404.00	9.9%	$83,884.00	6.9%	$205,288.00
	Setups	$32,560.00	2.7%	$96,800.00	7.9%	$129,360.00
	Product sustaining	$50,500.00	4.1%	$50,500.00	4.1%	$101,000.00
	Total cost assigned to products	$724,564.00	59.3%	$436,784.00	35.7%	$1,161,348.00
	Costs not assigned to products:					$60,900.00
	Total cost	$724,564.00		$436,784.00		$1,222,248.00
	Plantwide Overhead allocation rate = Manufacturing Overhead / Total Direct Labor cost = $496548 / $162900 = $3.05 per direct labor dollar
	Activity rate for Machining = $205288 / 153200 machine hours = $1.34 per machine hour
	Activity rate for setup = $129360 / 294 setups = $440 per setup
	Product sustaining = $101000 / 2 products = $50,500 per product