Question

Hi-Tek produced and sold 70,000 units of B300 at a price of $20 per unit and 17,500 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: Hi-Tek Manufacturing Inc. Income Statement Sales ……………………………………………………….. $2,100,000 Cost of goods sold ………………………………….. 1,600,000 Gross Margin ..……………............................... 500,000 Selling and administrative expenses …………. 550,000 Net operating loss ……………………………….…… $ (50,000) Hi-Tek produced and sold 70,000 units of B300 at a price of $20 per unit and 17,500 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 products lines is shown below; D300 T500 Total Direct materials ……………………….. $436,300 $251,700 $688,000 Direct Labor …………………………….. $200,000 $104,000 304,000 Manufacturing overhead …………. 608,000 Costs of goods sold ………………….. $1,600,000 The computer has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $50,000 and $100,000 of the company’s advertising expenses could be directly traced to B300 and T500, respectively. The reminder 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) D300 T500 Total Machining (Machine-hours) ………………….. $213,500 90,000 62,500 152,500 Setsup (setup hours) .……………………………. 157,500 75 300 375 Product-sustaining (number of Product)... 120,000 1 1 2 Other (organization-sustaining costs) …... 117,000 NA NA NA Total manufacturing overhead cost ……… $608,000 Required; 1. Using Exhibit 6-13 as a guide, compute the product margins for the B300 and T500 under the company’s traditional costing system. 2. Using exhibit 6-11 as a guide, compute the product margins for B300 and T500 under the activity-based costing system. 3. Using Exhibit 6-14 as a guide prepare a quantitative comparison of the traditional and activity-based cost assignments. Explain why the traditional and activity-based cost assignment differ.

Answer 1

			B300	T500	Total
		Units	70000	17500
		Sales Price	20.00	40.00
		Direct Material	436300	251700	688000		Total Manufacturing OH	608000
		Direct Labor	200000	104000	304000		Total Direct Labor Dollars	304000
		Manufacturing OH			608000		Overhead Per Dollars	2.00
		Cost of Goods Sold			1600000
							Allocated MOH	400000	208000	(DL Dollars*2)
							Units	70000	17500
	1		B300	T500			PU	5.71	11.89
		Sales Price	20.00	40.00
		Less: Direct Material	6.23	14.38
		Less: Direct Labor	2.86	5.94
		Less: Maufacturing OH	5.71	11.89
		Product Margin	5.20	7.79	12.98
	2		B300	T500			Activity Pools	Amt	B300	T500	Total	Per Driver
		Sales Price	20.00	40.00			Machining	213500	90000	62500	152500	1.40
		Less: Direct Material	6.23	14.38			Setups	157500	75	300	375	420
		Less: Direct Labor	2.86	5.94			Product Sustaining	120000	1	1	2	60,000
		Less: Maufacturing OH	3.11	15.63	From Right Side		Other	117000	NA	NA	NA
		Product Margin	7.80	4.05			Total M OH	608000
							Allocation:	B300	T500
							Machining	126000	87500	(Activity Driver* Rate)
							Setups	31500	126000	(Activity Driver* Rate)
							Product Sustaining	60000	60000	(Activity Driver* Rate)
							Total M OH	217500	273500				117000
							Units	70000	17500
			B300	T500			Manufacturing OH	3.11	15.63
			70000	17500
	3
			B300		T500		Total
		Traditional Cost System	Amount	%	Amount	%	Amount
		Direct Material	4,36,300	42.1%	2,51,700	44.7%	6,88,000
		Direct Labor	2,00,000	19.3%	1,04,000	18.4%	3,04,000
		Manufacturing OH	4,00,000	38.6%	2,08,000	36.9%	6,08,000
		Total Cost assigned to products	10,36,300	100.0%	5,63,700	100.0%	16,00,000
		Activity Based Costing	Amount	%	Amount	%	Amount
		Direct Costs:
		Direct Material	4,36,300	51.1%	2,51,700	40.0%	6,88,000
		Direct Labor	2,00,000	23.4%	1,04,000	16.5%	3,04,000
		Indirect Costs:
		Machining	1,26,000	14.8%	87,500	13.9%	2,13,500
		Setups	31,500	3.7%	1,26,000	20.0%	1,57,500
		Product Sustaining	60,000	7.0%	60,000	9.5%	1,20,000
		Total Cost assigned to products	8,53,800	100.0%	6,29,200	100.0%	14,83,000
		Costs not assigned to products:
		Others					117000
		Total Cost					16,00,000