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		1,226,070
Gross margin		475,230
Selling and administrative expenses		590,000
Net operating loss	$	(114,770	)

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	$	401,000	$	162,400	$	563,400
Direct labor	$	120,900	$	42,400		163,300
Manufacturing overhead						499,370
Cost of goods sold					$	1,226,070

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $57,000 and $106,000 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)	$	203,490		90,000	63,000	153,000
Setups (setup hours)		133,980		79	240	319
Product-sustaining (number of products)		101,800		1	1	2
Other (organization-sustaining costs)		60,100		NA	NA	NA
Total manufacturing overhead cost	$	499,370

Required:

1. Compute the product margins for the B300 and T500 under the company’s traditional costing system. Completed below.

314,389

160,841

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

Part 1
	Plantwide Overhead Rate =$499,370 / $163,300 =$3.05799143 per $ of direct labor
	Computation of Product Margin
		B300	T500	Total
	Sales	$                       12,06,000	$                                 4,95,300	$                     17,01,300
	Less:Direct materials	$                         4,01,000	$                                 1,62,400	$                       5,63,400
	Less:Direct labor	$                         1,20,900	$                                    42,400	$                       1,63,300
	Less:Manufacturing Overhead	$                         3,69,711	$                                 1,29,659	$                       4,99,370
	Less:Allocated Selling and admin expenses	$                            57,000	$                                 1,06,000	$                       1,63,000
	Product Margin	$                         2,57,389	$                                    54,841	$                       3,12,230
	Less:Common Selling and admin expenses			$                       4,27,000
	Net Income	$                         2,57,389	$                                    54,841	$                      -1,14,770
Part 2
	Computation of ABC rate
	Activity	OH Costs(Col 1)	No. of activity base(Col 2)	Activity Rate(Col 1 / Col 2)
	Machining	$                         2,03,490	1,53,000	$                              1.33	per machine hours
	Setups	$                         1,33,980	319	$                          420.00	per setup hours
	Product-Sustaining	$                         1,01,800	2	$                     50,900.00	per product
	Total Cost	$                         4,39,270
		B300	T500
		Activity Based usage	Activity Based usage*ABC rate	Activity Based usage	Activity Based usage*ABC rate
	Machining	90000	$                                 1,19,700	$                          63,000	$                                    83,790
	Setups	79	$                                    33,180	$                               240	$                                 1,00,800
	Product-Sustaining	1	$                                    50,900	$                                   1	$                                    50,900
	Total Overhead Cost allocated		$                                 2,03,780		$                                 2,35,490
	Computation of Product Margin
		B300	T500	Total
	Sales	$                       12,06,000	$                                 4,95,300	$                     17,01,300
	Less:Direct materials	$                         4,01,000	$                                 1,62,400	$                       5,63,400
	Less:Direct labor	$                         1,20,900	$                                    42,400	$                       1,63,300
	Less:Allocated Manufacturing Overhead	$                         2,03,780	$                                 2,35,490	$                       4,39,270
	Less:Allocated Advertising expenses	$                            57,000	$                                 1,06,000	$                       1,63,000
	Product Margin	$                         4,23,320	$                                   -50,990	$                       3,72,330
	Less:Common Manufacturing Overhead			$                          60,100
	Less:Common Selling and admin expenses			$                       4,27,000
	Net Income			$                      -1,14,770
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