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	$	1,644,900
Cost of goods sold		1,239,653
Gross margin		405,247
Selling and administrative expenses		650,000
Net operating loss	$	(244,753	)

Hi-Tek produced and sold 60,300 units of B300 at a price of $19 per unit and 12,800 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	$	163,000	$	563,200
Direct labor	$	120,000	$	42,300		162,300
Manufacturing overhead						514,153
Cost of goods sold					$	1,239,653

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $59,000 and $105,000 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)	$	212,253		90,400	62,300	152,700
Setups (setup hours)		140,700		75	260	335
Product-sustaining (number of products)		100,800		1	1	2
Other (organization-sustaining costs)		60,400		NA	NA	NA
Total manufacturing overhead cost	$	514,153

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

Traditional mathod:

Particular	B300	T500	Total
Sales(60300*19),(12800*39)	1145700	499200	1644900
Less:Direct Material	400200	163000	563200
Less:Direct Labour	120000	42300	162300
Less:Manufacturing Overhead (514153*120000/162300) (514153*42300/162300)	380150	134003	514153
Gross Profit	245350	159897	405247
Product Margin%= (245350/1145700)*100 (159897/499200)*100	21.41%	32.03%

Activity Based Costing:

Particular	Basis	B300	T500	Total
Sales		1145700	499200	1644900
Less:Machining	(212253/152700*90400) (212253/152700*62300)	125656	86597	212253
Less:Set Up	(140700/335*75) (140700/335*260)	31500	109200	140700
Less :Product Sustaining	100800/2	50400	50400	100800
Gross Profit		938144	253003	1191147
Product margin%	(938144/1145700*100) 253003/499200*100	81.88	50.68

Quantative Comparison:

Partcular	B300	T500
Product Margin As per ABC	81.88%`	50.68%
Product Margin As per Traditional	21.41%	32.03%