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	$	1,699,200
Cost of goods sold		1,228,786
Gross margin		470,414
Selling and administrative expenses		590,000
Net operating loss	$	(119,586	)

Hi-Tek produced and sold 60,000 units of B300 at a price of $20 per unit and 12,800 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	$	400,400	$	162,200	$	562,600
Direct labor	$	120,000	$	42,600		162,600
Manufacturing overhead						503,586
Cost of goods sold					$	1,228,786

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 $109,000 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)	$	212,106		90,900	62,800	153,700
Setups (setup hours)		130,380		78	240	318
Product-sustaining (number of products)		100,200		1	1	2
Other (organization-sustaining costs)		60,900		NA	NA	NA
Total manufacturing overhead cost	$	503,586

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.

Compute the product margins for the B300 and T500 under the company’s traditional costing system. (Round your intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)

	B300 T500 Total Product margin $0

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.)

	B300 T500 Total Product margin $0

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

1)	predetermined overhead rate
	total estimated manufacturing overhead/total estimated direct labor dollars
	503586/162600
	3.097085
	product margin using traditional appraoch
					B300	T500	total
	sales				1200000	499200	1699200
	less:Expenses
	direct materials				400400	162200	562600
	direct labor				120000	42600	162600
	manufacturing OH applied @3.09				371650	131936	503586
	total manufacturing cost				892050	336736	1228786
	product margin				307950	162464	470414	answer
2)	ABC activity based
	Activity rates
					(a)	(b)	c=a/b
	Activity cost pools				total cost	total	Activity rate
						activity
	machining				212,106	153,700	1.38	per machine hour
	Setups				130,380	318	410	per setup hour
	product sustaining				100,200	2	50100	per product
	product margin under ABC accounting
					B300	T500	total
	sales				1200000	499200	1699200
	less:Expenses
	direct materials				400400	162200	562600
	direct labor				120000	42600	162600
	Advertising expense				52,000	109,000	161000
	manufacturing overhead assigned
	machining				125442	86664	212106
	Setups				31980	98400	130380
	product sustaining				50100	50100	100200
	total cost				779,922	548,964	1328886
	product margin				420078	-49764	370314
	Traditional cost system			B        300		T -500
3)					% of total		% of total	Total
				amount	amount	amount	amount	amount
	Traditional cost system
	Direct materials			400400	71.2%	162200	28.8%	562600
	direct labor			120000	73.8%	42600	26.2%	162600
	manufacturing overhead			371650	73.8%	131936	26.2%	503586
	total cost assigned to products							1228786
	selling & administrative cost							590,000
	total cost.							1818786
				B        300		T -500
					% of total		% of total	Total
				amount	amount	amount	amount	amount
	ABC based costing system
	Direct costs
	direct materials			400400	71.2%	162200	28.8%	562600
	direct labor			120000	73.8%	42600	26.2%	162600
	Advertising expense			52,000	32.3%	109,000	67.7%	161000
	Indirect costs:
	machining			125442	59.1%	86664	40.9%	212106
	Setups			31980	24.5%	98400	75.5%	130380
	product sustaining			50100	50.0%	50100	50.0%	100200
	total cost assigned to products			779922		548964		1328886
	cost not assigned to products
	Selling & administrative expense							429,000
	other							60,900
	total cost.							1818786