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 $ 1,712,000 Cost of goods sold 1,234,045 Gross margin 477,955 Selling and administrative expenses 590,000 Net operating loss $ (112,045 ) Hi-Tek produced and sold 60,400 units of B300 at a price of $20 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 $ 400,600 $ 162,700 $ 563,300 Direct labor $ 120,200 $ 42,400 162,600 Manufacturing overhead 508,145 Cost of goods sold $ 1,234,045 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 $102,000 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) $ 207,225 90,900 62,600 153,500 Setups (setup hours) 139,020 71 260 331 Product-sustaining (number of products) 101,600 1 1 2 Other (organization-sustaining costs) 60,300 NA NA NA Total manufacturing overhead cost $ 508,145 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

Solution 1:

Predetermined overhead rate = Estimated overhead / Estimated direct labor dollars

= $508,145 / $162,600 = $3.125123 per direct labor dollar

Computation of Product Margin - Traditional Costing System
Particulars	B300	T500	Total
Sales (B300 - 60,400*$20, T500 - 12600*$40)	$1,208,000	$504,000	$1,712,000
Direct material	$400,600	$162,700	$563,300
Direct labor	$120,200	$42,400	$162,600
Manufacturing overhead (Direct labor * $3.125123)	$375,640	$132,505	$508,145
Product Margin	$311,560	$166,395	$477,955

Solution 2:

Determination of activity rate for each activity & allocation of overhead
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	B300		T500
					Usage	Allocated Costs	Usage	Allocated Costs
Machining	$207,225.00	Machine hours	153500	$1.35	90900	$122,715.00	62600	$84,510.00
Setups	$139,020.00	Setup hours	331	$420.00	71	$29,820.00	260	$109,200.00
Product sustaining	$101,600.00	Number of products	2	$50,800.00	1	$50,800.00	1	$50,800.00
Other	$60,300.00	No allocation
Total	$508,145.00					$203,335.00		$244,510.00

Computation of Product Margin - Activity based Costing System
Particulars	B300	T500	Total
Sales (B300 - 60,400*$20, T500 - 12600*$40)	$1,208,000	$504,000	$1,712,000
Direct material	$400,600	$162,700	$563,300
Direct labor	$120,200	$42,400	$162,600
Allocated Manufacturing overhead	$203,335.00	$244,510.00	$447,845
Advertising Expense	$52,000.00	$102,000.00	$154,000.00
Product Margin	$431,865.00	-$47,610.00	$384,255.00

Solution 3:

Quantity comparison of traditional cost assignment
Particulars	B300		T500		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Material Cost	$400,600	71.1%	$162,700	28.9%	$563,300
Direct Labor Cost	$120,200	73.9%	$42,400	26.1%	$162,600
Manufacturing Overhead cost	$375,640	73.9%	$132,505	26.1%	$508,145
Total cost assigned to products	$896,440		$337,605		$1,234,045
Total cost not assigned to product:
Selling and adminstrative Expenses					$590,000.00
Total Cost					$1,824,045

Quantity comparison of Activity Based cost assignment
Particulars	B300		T500		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Cost:
Material Cost	$400,600	71.1%	$162,700	28.9%	$563,300
Labor Cost	$120,200	73.9%	$42,400	26.1%	$162,600
Advertising Expense	$52,000	33.8%	$102,000	66.2%	$154,000
Indirect Cost:
Machining	$122,715	59.2%	$84,510	40.8%	$207,225
Setups	$29,820	21.5%	$109,200	78.5%	$139,020
Product sustaining	$50,800	50.0%	$50,800	50.0%	$101,600
Total Cost Assigned to Products	$776,135		$551,610		$1,327,745
Cost not assigned to products:
Manufacturing					$60,300
Selling and administrative					$436,000
Total Cost					$1,824,045