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	$	1,653,500
Cost of goods sold		1,228,144
Gross margin		425,356
Selling and administrative expenses		640,000
Net operating loss	$	(214,644	)

Hi-Tek produced and sold 60,500 units of B300 at a price of $19 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	$	400,400	$	162,400	$	562,800
Direct labor	$	120,900	$	42,800		163,700
Manufacturing overhead						501,644
Cost of goods sold					$	1,228,144

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $55,000 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)	$	207,944		90,300	62,600	152,900
Setups (setup hours)		132,300		75	240	315
Product-sustaining (number of products)		101,400		1	1	2
Other (organization-sustaining costs)		60,000		NA	NA	NA
Total manufacturing overhead cost	$	501,644

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

Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you.
Part 1
		B300		T500		Total
Sales			$1,149,500		$      504,000		$ 1,653,500
Less: Cost of Goods Sold
Direct Material		$     400,400		$      162,400		$   562,800
Direct Labor		$     120,900		$        42,800		$   163,700
Manufacturing Overhead	$501,644/$163,700*Direct Labor Cost	$     370,487	$ -891,787	$      131,157	$    -336,357	$   501,644	$-1,228,144
Product Margin			$   257,713		$      167,643		$     425,356
Less: Traceable Expense
Selling and Admin			$    -55,000		$    -103,000		$   -158,000
Net Product Margin			$   202,713		$        64,643		$     267,356
Part 2
		B300		T500		Total
Sales			$1,149,500		$      504,000		$ 1,653,500
Less: Cost of Goods Sold
Direct Material		$     400,400		$      162,400		$   562,800
Direct Labor		$     120,900		$        42,800		$   163,700
Manufacturing Overhead
Machining (machine-hours)		$     122,808		$        85,136		$   207,944
Setups (setup hours)		$        31,500		$      100,800		$   132,300
Product-sustaining (number of products)		$        50,700	$ -726,308	$        50,700	$    -441,836	$   101,400	$-1,168,144
Product Margin			$   423,192		$        62,164		$     485,356
Less: Traceable Expense
Selling and Admin			$    -55,000		$    -103,000		$   -158,000
Net Product Margin			$   368,192		$      -40,836		$     327,356
	A	B	C	B+C=D	A/D=E	E*B	E*C
Activity Cost Pool (and Activity Measure)	Amount	B300	T500	Total	Activity Rate	B300	T500
Machining (machine-hours)	$                                                 207,944	90,300	62,600	152,900	$            1.36	$   122,808	$       85,136
Setups (setup hours)	$                                                 132,300	75	240	315	$        420.00	$     31,500	$     100,800
Product-sustaining (number of products)	$                                                 101,400	1	1	2	$ 50,700.00	$     50,700	$       50,700
Other (organization-sustaining costs)	$                                                   60,000
Total manufacturing overhead cost	$                                                 501,644					$   205,008	$     236,636
Part 3
Traditional		B300		T500		Total
		Amount	Percentage	Amount	Percentage
Direct Material		$     400,400	71.14%	$      162,400	28.86%	$   562,800
Direct Labor		$     120,900	73.85%	$        42,800	26.15%	$   163,700
Manufacturing Overhead		$     370,487	73.85%	$      131,157	26.15%	$   501,644
Total Cost Assigned to Product		$     891,787	72.61%	$      336,357	27.39%	$1,228,144
Selling and Admin		$        55,000	34.81%	$      103,000	65.19%	$   158,000
Total Cost		$     946,787	68.30%	$      439,357	31.70%	$1,386,144
Activity		B300		T500		Total
		Amount	Percentage	Amount	Percentage
Direct Material		$     400,400	71.14%	$      162,400	28.86%	$   562,800
Direct Labor		$     120,900	73.85%	$        42,800	26.15%	$   163,700
Machining (machine-hours)		$     122,808	59.06%	$        85,136	40.94%	$   207,944
Setups (setup hours)		$        31,500	23.81%	$      100,800	76.19%	$   132,300
Product-sustaining (number of products)		$        50,700	50.00%	$        50,700	50.00%	$   101,400
Total Cost Assigned to Product		$     726,308	62.18%	$      441,836	37.82%	$1,168,144
Selling and Admin		$        55,000	34.81%	$      103,000	65.19%	$   158,000
Total Cost		$     781,308	58.92%	$      544,836	41.08%	$1,326,144