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	$ 1,770,300
Cost of goods sold	1,245,686
Gross margin	524,614
Selling and administrative expenses	590,000
Net operating loss	$ (65,386 )

Hi-Tek produced and sold 60,300 units of B300 at a price of $21 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	$ 400,600.00	$ 162,400.00	$    563,000.00
Direct Labor	$ 120,400.00	$   42,400.00	$    162,800.00
Manufacturing Overhead			$    519,886.00
Cost of goods sold			$ 1,245,686.00

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $56,000 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:

	Activity
Activity Cost Pool (and Activity Measure)	Manufacturing Overhead	B300	T500	Total
Machining (machine-hours)	$                       206,856.00	$   90,000.00	$       62,100.00	$ 152,100.00
Setups (setup hours)	$                       150,930.00	71	280	351
Product-sustaining (number of products)	$                       101,200.00	1	1	2
Other (organization-sustaining costs)	$                         60,900.00	NA	NA	NA
Total manufacturing overhead cost	$                       519,886.00

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
Unit sold	60,300	12,600
Selling price per unit	21	40
Sales revenue	1266300	504000
Manufacturing Overhead		519,886.00
Divided by: Direct Labor		162,800.00
Overhead rate per one dollar labor cost		3.19340295
Cost allocated to B300 (120400*3.1934029)		384486
Cost allocated to T500 (42400*3.1934029)		135400
Product	B300		T500
Unit sold	60300		12600
	Total	Per unit	Total	Per unit
Sales revenue	1266300	21.00	504000	40.00
Less:
Direct Materials	400,600	6.64	162,400	12.89
Direct Labor	120,400	2.00	42,400	3.37
Manufacturing Overhead	384486	6.38	135400	10.75
Product cost per unit	905,486	15.02	340,200	5.64
Product margin per unit		5.98		34.36

Answer 2

	Activity
Activity Cost Pool (and Activity Measure)	Manufacturing Overhead	B300	T500	Total	Cost driver rate (Manufacturing Overhead / Total Activity)
Machining (machine-hours)	206,856.00	90,000	62,100	152,100	1.36
Setups (setup hours)	150,930.00	71	280	351	430
Product-sustaining (number of products)	101,200.00	1	1	2	50600
Other (organization-sustaining costs)	60,900.00	NA	NA	NA
Total manufacturing overhead cost	519,886.00
Product	B300
Activity Cost Pool (and Activity Measure)	Cost driver rate	Activity	Allocated cost (Cost driver rate * Activity)
Machining (machine-hours)	1.36	90,000	122,400
Setups (setup hours)	430	71	30,530
Product-sustaining (number of products)	50600	1	50,600
Allocated overhead			203,530
Product	T500
Activity Cost Pool (and Activity Measure)	Cost driver rate	Activity	Allocated cost (Cost driver rate * Activity)
Machining (machine-hours)	1.36	62,100	84,456
Setups (setup hours)	430	280	120,400
Product-sustaining (number of products)	50600	1	50,600
Allocated overhead			255,456
Product	B300		T500
Unit sold	60300		12600
	Total	Per unit	Total	Per unit
Sales revenue	1266300	21.00	504000	40.00
Less:
Direct Materials	400,600	6.64	162,400	12.89
Direct Labor	120,400	2.00	42,400	3.37
Manufacturing Overhead	203530	3.38	255456	20.27
Product cost per unit	724,530	12.02	460,256	7.63
Product margin per unit		8.98		32.37

Answer 3

Margin comparison between two method
Product	B300	T500
Traditional costing	$                  5.98	$    34.36
Activity based costing	$                  8.98	$    32.37