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	$	1,701,300
Cost of goods sold		1,220,884
Gross margin		480,416
Selling and administrative expenses		630,000
Net operating loss	$	(149,584	)

Hi-Tek produced and sold 60,300 units of B300 at a price of $20 per unit and 12,700 units of T500 at a price of $39 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	$	120,900	$	42,700		163,600
Manufacturing overhead						494,784
Cost of goods sold					$	1,220,884

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $57,000 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)	$	212,244		90,900	62,900	153,800
Setups (setup hours)		120,540		77	210	287
Product-sustaining (number of products)		101,400		1	1	2
Other (organization-sustaining costs)		60,600		NA	NA	NA
Total manufacturing overhead cost	$	494,784

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	Total
No. of units	60,300	12,700	73,000
Sale price per unit	$              20	$           39
Sale Value	$ 1,206,000	$ 495,300	$ 1,701,300
Direct Material	$    400,200	$ 162,300	$    562,500
Direct Labor	$    120,900	$   42,700	$    163,600
Total Direct Costs	$    521,100	$ 205,000	$    726,100
Manufacturing Overhead (Traditional Costing)	$    365,644	$ 129,140	$    494,784
Total Product Cost	$    886,744	$ 334,140	$ 1,220,884
Product Margin	$    319,256	$ 161,160	$    480,416

Answer 2

	B300	T500	Total
No. of units	60,300	12,700	73,000
Sale price per unit	$              20	$           39	$               -
Sale Value	$ 1,206,000	$ 495,300	$ 1,701,300
Direct Material	$    400,200	$ 162,300	$    562,500
Direct Labor	$    120,900	$   42,700	$    163,600
Total Direct Costs	$    521,100	$ 205,000	$    726,100
Manufacturing Overhead (ABC)	$    265,482	$ 333,702	$    599,184
Total Product Cost	$    786,582	$ 538,702	$ 1,325,284
Product Margin	$    419,418	$ (43,402)	$    376,016

Note:

Activity	Activity Cost Pool	Cost driver	B300	T500	Total
Machining	$             212,244	Machine hours	$ 125,442	$   86,802	$ 212,244
Setups	$             120,540	Setup hours	$   32,340	$   88,200	$ 120,540
Product Sustaining	$             101,400	No. of products	$   50,700	$   50,700	$ 101,400
Advertising Cost	$             165,000		$   57,000	$ 108,000	$ 165,000
Total	$             599,184		$ 265,482	$ 333,702	$ 599,184

Answer 3

	B300	T500
	Amount	% of total amount	Amount	% of total amount	Amount
Traditional Cost system
Direct material	$ 400,200	71.1%	$ 162,300	28.9%	$    562,500
Direct labour	$ 120,900	73.9%	$   42,700	26.1%	$    163,600
Manufacturing overhead	$ 365,644	73.9%	$ 129,140	26.1%	$    494,784
Total cost assigned to products	$ 886,744		$ 334,140		$ 1,220,884
Selling and administrative					$    630,000
Total Cost					$ 1,850,884
	B300	T500	Total
	Amount	%	Amount	%	Amount
Activity Based Costing System
Direct Costs
Direct material	$ 400,200	71.1%	$ 162,300	28.9%	$    562,500
Direct labour	$ 120,900	73.9%	$   42,700	26.1%	$    163,600
Advertising	$   57,000	34.5%	$ 108,000	65.5%	$    165,000
Indirect Costs
Machining	$ 125,442	59.1%	$   86,802	40.9%	$    212,244
Setups	$   32,340	26.8%	$   88,200	73.2%	$    120,540
Product Sustaining	$   50,700	50.0%	$   50,700	50.0%	$    101,400
Total Cost assigned to products	$ 786,582	59.4%	$ 538,702	40.6%	$ 1,325,284
Costs not assigned to products
Other					$       60,600
Selling and administrative					$    465,000
Total Costs					$ 1,850,884