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	$	1,768,000
Cost of goods sold		1,250,070
Gross margin		517,930
Selling and administrative expenses		560,000
Net operating loss	$	(42,070	)

Hi-Tek produced and sold 60,000 units of B300 at a price of $21 per unit and 12,700 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	$	400,200	$	162,300	$	562,500
Direct labor	$	120,800	$	42,200		163,000
Manufacturing overhead						524,570
Cost of goods sold					$	1,250,070

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $51,000 and $108,000 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)	$	207,630		90,900	62,900	153,800
Setups (setup hours)		154,440		71	280	351
Product-sustaining (number of products)		102,000		1	1	2
Other (organization-sustaining costs)		60,500		NA	NA	NA
Total manufacturing overhead cost	$	524,570

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

	B300	T500	Total
Sales	$1,260,000	$508,000	$1,768,000
	60000*21	12700*40
Direct materials	$400,200	$162,300	$562,500
Direct labor	120,800	42,200	163,000
Manufacturing overhead applied	388,761	135,809	524,570
Total manufacturing costs	$909,761	$340,309	$1,250,070
Product margin (Traditional Gross Margin)	$350,239	$167,691	$517,930

PMOH Rate =	Estimated total mfg. OH cost / Estimated total DL $
PMOH Rate =	$524,570	/	$163,000	$3	per DL$

	B300	T500	Total
Sales	$1,260,000	$508,000	$1,768,000
Direct materials	$400,200	$162,300	$562,500
Direct labor	120,800	42,200	163,000
Advertising expense	51,000	108,000	159,000
MOH assigned (2nd Stage Allocations)
Machining pool	122,715	84,915	207,630
Setup pool	31,240	123,200	154,440
Product sustaining	51,000	51,000	102,000
Total costs assigned	$776,955	$571,615	$1,348,570
Product margin (ABC)	$483,045	($63,615)	$419,430

Traditional Costing	B300	T500	Total
Sales	$1,260,000	$508,000	$1,768,000
Direct materials	$400,200	$162,300	$562,500
Direct labor	120,800	42,200	163,000
Manufacturing overhead applied	388,761	135,809	524,570
Total manufacturing costs	$909,761	$340,309	$1,250,070
Product margin (Traditional)	$350,239	$167,691	$517,930
Selling & administrative			560,000
Net operating costs			($42,070)
Note: Total costs accounted for			$1,810,070
ABC Costing	B300	T500	Total
Sales	$1,260,000	$508,000	$1,768,000
Direct materials	$400,200	$162,300	$562,500
Direct labor	120,800	42,200	$163,000
Advertising expense (traced)	51,000	108,000	$159,000
Mfg. Overhead assigned
Machining pool	122,715	84,915	$207,630
Setup pool	31,240	123,200	$154,440
Product sustaining	51,000	51,000	$102,000
Total costs assigned	$776,955	$571,615	$1,348,570
Product margin (ABC)	$483,045	($63,615)	$419,430
Selling & Administrative (Indirect) 560000-108000-51000			401,000
Organizational Sustaining Costs			60,500
Net operating income			($42,070)
Note: Total costs accounted for			$1,810,070