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	$	1,774,300
Cost of goods sold		1,229,084
Gross margin		545,216
Selling and administrative expenses		570,000
Net operating loss	$	(24,784	)

Hi-Tek produced and sold 60,300 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	$	400,300	$	162,500	$	562,800
Direct labor	$	120,800	$	42,200		163,000
Manufacturing overhead						503,284
Cost of goods sold					$	1,229,084

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)	$	209,884		90,700	62,500	153,200
Setups (setup hours)		132,300		75	240	315
Product-sustaining (number of products)		100,600		1	1	2
Other (organization-sustaining costs)		60,500		NA	NA	NA
Total manufacturing overhead cost	$	503,284

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.

Please include steps and work

Answer 1

1)	predetermined overhead rate
	total estimated manufacturing overhead/total estimated direct labor dollars
	503,284/163,000
	3.087632
	product margin using traditional appraoch
					B300	T500	total
	sales				1266300	508000	1774300
	less:Expenses
	direct materials				400300	162500	562800
	direct labor				120800	42200	163000
	manufacturing OH applied @3.09				372986	130298	503284
	total manufacturing cost				894086	334998	1229084
	product margin				372214	173002	545216	answer
2)	ABC activity based
	Activity rates
					(a)	(b)	c=a/b
	Activity cost pools				total cost	total	Activity rate
						activity
	machining				209,884	153,200	1.37	per machine hour
	Setups				132,300	315	420	per setup hour
	product sustaining				100,600	2	50300	per product
	product margin under ABC accounting
					B300	T500	total
	sales				1266300	508000	1774300
	less:Expenses
	direct materials				400300	162500	562800
	direct labor				120800	42200	163000
	Advertising expense				51,000	108,000	159000
	manufacturing overhead assigned
	machining				124259	85625	209884
	Setups				31500	100800	132300
	product sustaining				50300	50300	100600
	total cost				778,159	549,425	1327584
	product margin				488141	-41425	446716
	Traditional cost system			B        300		T -500
3)					% of total		% of total	Total
				amount	amount	amount	amount	amount
	Traditional cost system
	Direct materials			400300	71.1%	162500	28.9%	562800
	direct labor			120800	74.1%	42200	25.9%	163000
	manufacturing overhead			372986	74.1%	130298	25.9%	503284
	total cost assigned to products							1229084
	selling & administrative cost							570,000
	total cost.							1799084
				B        300		T -500
					% of total		% of total	Total
				amount	amount	amount	amount	amount
	ABC based costing system
	Direct costs
	direct materials			400300	71.1%	162500	28.9%	562800
	direct labor			120800	74.1%	42200	25.9%	163000
	Advertising expense			51,000	32.1%	108,000	67.9%	159000
	Indirect costs:
	machining			124259	59.2%	85625	40.8%	209884
	Setups			31500	23.8%	100800	76.2%	132300
	product sustaining			50300	50.0%	50300	50.0%	100600
	total cost assigned to products			778159		549425		1327584
	cost not assigned to products
	Selling & administrative expense							411,000
	other							60,500
	total cost.							1799084