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	$	1,706,000
Cost of goods sold		1,267,012
Gross margin		438,988
Selling and administrative expenses		560,000
Net operating loss	$	(121,012	)

Hi-Tek produced and sold 60,300 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	$	400,400	$	162,500	$	562,900
Direct labor	$	120,700	$	42,600		163,300
Manufacturing overhead						540,812
Cost of goods sold					$	1,267,012

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $53,000 and $101,000 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)	$	212,392		90,500	62,300	152,800
Setups (setup hours)		166,320		78	300	378
Product-sustaining (number of products)		101,400		1	1	2
Other (organization-sustaining costs)		60,700		NA	NA	NA
Total manufacturing overhead cost	$	540,812

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
	540812/163300
	3.31177
	product margin using traditional appraoch
					B300	T500	total
	sales				1206000	500000	1706000
	less:Expenses
	direct materials				400400	162500	562900
	direct labor				120700	42600	163300
	manufacturing OH applied @3.09				399731	141081	540812
	total manufacturing cost				920831	346181	1267012
	product margin				285169	153819	438988	answer
2)	ABC activity based
	Activity rates
					(a)	(b)	c=a/b
	Activity cost pools				total cost	total	Activity rate
						activity
	machining				212,392	152,800	1.39	per machine hour
	Setups				166,320	378	440	per setup hour
	product sustaining				101,400	2	50700	per product
	product margin under ABC accounting
					B300	T500	total
	sales				1206000	500000	1706000
	less:Expenses
	direct materials				400400	162500	562900
	direct labor				120700	42600	163300
	Advertising expense				53,000	101,000	154000
	manufacturing overhead assigned
	machining				125795	86597	212392
	Setups				34320	132000	166320
	product sustaining				50700	50700	101400
	total cost				784,915	575,397	1360312
	product margin				421085	-75397	345688
	Traditional cost system			B        300		T -500
3)					% of total		% of total	Total
				amount	amount	amount	amount	amount
	Traditional cost system
	Direct materials			400400	71.1%	162500	28.9%	562900
	direct labor			120700	73.9%	42600	26.1%	163300
	manufacturing overhead			399731	73.9%	141081	26.1%	540812
	total cost assigned to products							1267012
	selling & administrative cost							560,000
	total cost.							1827012
				B        300		T -500
					% of total		% of total	Total
				amount	amount	amount	amount	amount
	ABC based costing system
	Direct costs
	direct materials			400400	71.1%	162500	28.9%	562900
	direct labor			120700	73.9%	42600	26.1%	163300
	Advertising expense			53,000	34.4%	101,000	65.6%	154000
	Indirect costs:
	machining			125795	59.2%	86597	40.8%	212392
	Setups			34320	20.6%	132000	79.4%	166320
	product sustaining			50700	50.0%	50700	50.0%	101400
	total cost assigned to products			784915		575397		1360312
	cost not assigned to products
	Selling & administrative expense							406,000
	other							60,700
	total cost.							1827012