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 $ 1,774,500 Cost of goods sold 1,226,437 Gross margin 548,063 Selling and administrative expenses 590,000 Net operating loss $ (41,937 ) Hi-Tek produced and sold 60,500 units of B300 at a price of $21 per unit and 12,600 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 $ 400,400 $ 162,500 $ 562,900 Direct labor $ 120,100 $ 42,400 162,500 Manufacturing overhead 501,037 Cost of goods sold $ 1,226,437 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $52,000 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) $ 203,357 90,400 62,500 152,900 Setups (setup hours) 135,080 77 230 307 Product-sustaining (number of products) 101,600 1 1 2 Other (organization-sustaining costs) 61,000 NA NA NA Total manufacturing overhead cost $ 501,037

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
	501037/162500
	3.083305
	product margin using traditional appraoch
					B300	T500	total
	sales				1270500	504000	1774500
	less:Expenses
	direct materials				400400	162500	562900
	direct labor				120100	42400	162500
	manufacturing OH applied @3.09				370305	130732	501037
	total manufacturing cost				890805	335632	1226437
	product margin				379695	168368	548063	answer
2)	ABC activity based
	Activity rates
					(a)	(b)	c=a/b
	Activity cost pools				total cost	total	Activity rate
						activity
	machining				203,357	152,900	1.33	per machine hour
	Setups				135,080	307	440	per setup hour
	product sustaining				101,600	2	50800	per product
	product margin under ABC accounting
					B300	T500	total
	sales				1270500	504000	1774500
	less:Expenses
	direct materials				400400	162500	562900
	direct labor				120100	42400	162500
	Advertising expense				52,000	109,000	161000
	manufacturing overhead assigned
	machining				120232	83125	203357
	Setups				33880	101200	135080
	product sustaining				50800	50800	101600
	total cost				777,412	549,025	1326437
	product margin				493088	-45025	448063
	Traditional cost system			B        300		T -500
3)					% of total		% of total	Total
				amount	amount	amount	amount	amount
	Traditional cost system
	Direct materials			400400	71.1%	162500	28.9%	562900
	direct labor			120100	73.9%	42400	26.1%	162500
	manufacturing overhead			370305	73.9%	130732	26.1%	501037
	total cost assigned to products							1226437
	selling & administrative cost							590,000
	total cost.							1816437
				B        300		T -500
					% of total		% of total	Total
				amount	amount	amount	amount	amount
	ABC based costing system
	Direct costs
	direct materials			400400	71.1%	162500	28.9%	562900
	direct labor			120100	73.9%	42400	26.1%	162500
	Advertising expense			52,000	32.3%	109,000	67.7%	161000
	Indirect costs:
	machining			120232	59.1%	83125	40.9%	203357
	Setups			33880	25.1%	101200	74.9%	135080
	product sustaining			50800	50.0%	50800	50.0%	101600
	total cost assigned to products			777412		549025		1326437
	cost not assigned to products
	Selling & administrative expense							429,000
	other							61,000
	total cost.							1816437