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	$	1,655,600
Cost of goods sold		1,245,008
Gross margin		410,592
Selling and administrative expenses		580,000
Net operating loss	$	(169,408	)

Hi-Tek produced and sold 60,400 units of B300 at a price of $19 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	$	162,700	$	562,900
Direct labor	$	120,700	$	42,400		163,100
Manufacturing overhead						519,008
Cost of goods sold					$	1,245,008

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $55,000 and $109,000 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)	$	210,158		90,900	62,500	153,400
Setups (setup hours)		147,150		77	250	327
Product-sustaining (number of products)		100,800		1	1	2
Other (organization-sustaining costs)		60,900		NA	NA	NA
Total manufacturing overhead cost	$	519,008

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

1)	predetermined overhead rate
	total estimated manufacturing overhead/total estimated direct labor dollars
	519008/163100
	3.182146
	product margin using traditional appraoch
					B300	T500	total
	sales				1147600	508000	1655600
	less:Expenses
	direct materials				400200	162700	562900
	direct labor				120700	42400	163100
	manufacturing OH applied @3.09				384085	134923	519008
	total manufacturing cost				904985	340023	1245008
	product margin				242615	167977	410592	answer
2)	ABC activity based
	Activity rates
					(a)	(b)	c=a/b
	Activity cost pools				total cost	total	Activity rate
						activity
	machining				210,158	153,400	1.37	per machine hour
	Setups				147,150	327	450	per setup hour
	product sustaining				100,800	2	50400	per product
	product margin under ABC accounting
					B300	T500	total
	sales				1147600	508000	1655600
	less:Expenses
	direct materials				400200	162700	562900
	direct labor				120700	42400	163100
	Advertising expense				55,000	109,000	164000
	manufacturing overhead assigned
	machining				124533	85625	210158
	Setups				34650	112500	147150
	product sustaining				50400	50400	100800
	total cost				785,483	562,625	1348108
	product margin				362117	-54625	307492
	Traditional cost system			B        300		T -500
3)					% of total		% of total	Total
				amount	amount	amount	amount	amount
	Traditional cost system
	Direct materials			400200	71.1%	162700	28.9%	562900
	direct labor			120700	74.0%	42400	26.0%	163100
	manufacturing overhead			384085	74.0%	134923	26.0%	519008
	total cost assigned to products							1245008
	selling & administrative cost							580,000
	total cost.							1825008
				B        300		T -500
					% of total		% of total	Total
				amount	amount	amount	amount	amount
	ABC based costing system
	Direct costs
	direct materials			400200	71.1%	162700	28.9%	562900
	direct labor			120700	74.0%	42400	26.0%	163100
	Advertising expense			55,000	33.5%	109,000	66.5%	164000
	Indirect costs:
	machining			124533	59.3%	85625	40.7%	210158
	Setups			34650	23.5%	112500	76.5%	147150
	product sustaining			50400	50.0%	50400	50.0%	100800
	total cost assigned to products			785483		562625		1348108
	cost not assigned to products
	Selling & administrative expense							416,000
	other							60,900
	total cost.							1825008