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	$	1,776,400
Cost of goods sold		1,233,700
Gross margin		542,700
Selling and administrative expenses		550,000
Net operating loss	$	(7,300	)

Hi-Tek produced and sold 60,400 units of B300 at a price of $21 per unit and 12,700 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	$	400,700	$	162,300	$	563,000
Direct labor	$	120,800	$	42,400		163,200
Manufacturing overhead						507,500
Cost of goods sold					$	1,233,700

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $59,000 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)	$	211,830		90,800	62,700	153,500
Setups (setup hours)		134,070		77	250	327
Product-sustaining (number of products)		101,000		1	1	2
Other (organization-sustaining costs)		60,600		NA	NA	NA
Total manufacturing overhead cost	$	507,500

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

Answer 1

	B300	T500	Total
No. of units	60,400	12,700	73,100
Sale price per unit	$                       21	$                        40
Sale Value	$          1,268,400	$               508,000	$ 1,776,400
Direct Material	$             400,700	$               162,300	$    563,000
Direct Labor	$             120,800	$                 42,400	$    163,200
Total Direct Costs	$             521,500	$               204,700	$    726,200
Manufacturing Overhead (Traditional Costing)	$             375,650	$               131,850	$    507,500
Total Product Cost	$             897,150	$               336,550	$ 1,233,700
Product Margin	$             371,250	$               171,450	$    542,700

Answer 2

	B300	T500	Total
No. of units	60,400	12,700	73,100
Sale price per unit	$              21	$           40	$               -
Sale Value	$ 1,268,400	$ 508,000	$ 1,776,400
Direct Material	$    400,700	$ 162,300	$    563,000
Direct Labor	$    120,800	$   42,400	$    163,200
Total Direct Costs	$    521,500	$ 204,700	$    726,200
Manufacturing Overhead (ABC)	$    266,374	$ 348,526	$    614,900
Total Product Cost	$    787,874	$ 553,226	$ 1,341,100
Product Margin	$    480,526	$ (45,226)	$    435,300

Note:

Activity	Activity Cost Pool	Cost driver	B300	T500	Total
Machining	$             211,830	Machine hours	$ 125,304	$   86,526	$ 211,830
Setups	$             134,070	Setup hours	$   31,570	$ 102,500	$ 134,070
Product Sustaining	$             101,000	No. of products	$   50,500	$   50,500	$ 101,000
Advertising Cost	$             168,000		$   59,000	$ 109,000	$ 168,000
Total	$             614,900		$ 266,374	$ 348,526	$ 614,900

Answer 3:

	B300		T500
	Amount	% of total amount	Amount	% of total amount	Amount
Traditional Cost system
Direct material	$ 400,700	71.2%	$ 162,300	28.8%	$    563,000
Direct labour	$ 120,800	74.0%	$   42,400	26.0%	$    163,200
Manufacturing overhead	$ 375,650	74.0%	$ 131,850	26.0%	$    507,500
Total cost assigned to products	$ 897,150		$ 336,550		$ 1,233,700
Selling and administrative					$    550,000
Total Cost					$ 1,783,700

Also,

	B300		T500		Total
	Amount	%	Amount	%	Amount
Activity Based Costing System
Direct Costs
Direct material	$ 400,700	71.2%	$ 162,300	28.8%	$    563,000
Direct labour	$ 120,800	74.0%	$   42,400	26.0%	$    163,200
Advertising	$   59,000	35.1%	$ 109,000	64.9%	$    168,000
Indirect Costs
Machining	$ 125,304	59.2%	$   86,526	40.8%	$    211,830
Setups	$   31,570	23.5%	$ 102,500	76.5%	$    134,070
Product Sustaining	$   50,500	50.0%	$   50,500	50.0%	$    101,000
Total Cost assigned to products	$ 787,874	58.7%	$ 553,226	41.3%	$ 1,341,100
Costs not assigned to products
Other					$      60,600
Selling and administrative					$    382,000
Total Costs					$ 1,783,700