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	$	1,761,600
Cost of goods sold		1,235,745
Gross margin		525,855
Selling and administrative expenses		620,000
Net operating loss	$	(94,145	)

Hi-Tek produced and sold 60,300 units of B300 at a price of $21 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	$	400,000	$	162,000	$	562,000
Direct labor	$	121,000	$	42,300		163,300
Manufacturing overhead						510,445
Cost of goods sold					$	1,235,745

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $56,000 and $104,000 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)	$	201,085		90,900	62,600	153,500
Setups (setup hours)		148,260		73	280	353
Product-sustaining (number of products)		100,600		1	1	2
Other (organization-sustaining costs)		60,500		NA	NA	NA
Total manufacturing overhead cost	$	510,445

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.

2.

ompute the product margins for B300 and T500 under the activity-based costing system. (Negative product margins should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places.)

	B300 T500 Total Product margin $0

3.

Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answers to 1 decimal place and and other answers to the nearest whole dollar amounts.)

B300 T500 Total % of % of Amount Amount Amount Traditional Cost System Direct materials % % Direct labor % % Manufacturing overhead % % Total cost assigned to products $0 $0 $0 Selling and administrative Total cost $0 B300 T500 Total % of % of Amount Total Amount Amount Total Amount Amount Activity-Based Costing System Direct costs: Direct materials % % Direct labor % % Advertising expense % % Indirect costs: Machining % % Setups % % Product sustaining % % Total cost assigned to products $0 $0 0 Costs not assigned to products: Selling and administrative Selling and administrative Total cost $0

Answer 1

• All working forms part of the answer
• Requirement 1: traditional costing and product margin

Intermediate answer rounded off to 2 decimal places.

Total manufacturing overhead cost	$510445
Total Direct Labor Dollars	$163300
Overhead per DL $	$3.13

Allocation and product margin

Working		B300	T500	Total
A	Direct material	400000	162000	562000
B	Direct labor	121000	42300	163300
C(calculated above)	Overhead per DL $	3.13	3.13	3.13
D=BxC	Overhead allocated	378730	132399	511129
E=A+B+C+D	Total cost	899730	336699	1236429
F	Units	60300	12700	73000
G	SP per unit	21	39
H=FxG	Sales Revenue	1266300	495300	1761600
I=H-E	Product margin	$366570	$158601	$525171

• Requirement 2: ABC Costing and product margin

Activity Rates calculation

	Manufacturing	Activity
Activity Cost Pool (and Activity Measure)	Overhead (A)-$	B300	T500	Total (B)	Activity Rate (A/B) - $
Machining (machine-hours)	201085	90900	62600	153500	1.31
Setups (setup hours)	148260	73	280	353	420
Product-sustaining (number of products)	100600	1	1	2	50300
Other (organization-sustaining costs)	60500	NA	NA	NA	NA
Total manufacturing overhead cost	$510445

Allocation using Activity rates

	Manufacturing		B300
Activity Cost Pool (and Activity Measure)	Overhead	Activity Rate (A)	No. of activity (B)	Cost Allocated (AxB)
Machining (machine-hours)	201085	1.31	90900	119079
Setups (setup hours)	148260	420	73	30660
Product-sustaining (number of products)	100600	50300	1	50300
Other (organization-sustaining costs)	60500	NA
Total manufacturing overhead cost	510445			$200039

	Manufacturing				T500
Activity Cost Pool (and Activity Measure)	Overhead		Activity Rate (A)		No. of activity (B)		Cost Allocated (AxB)
Machining (machine-hours)	201085	1.31		62600		82006
Setups (setup hours)	148260	420		280		117600
Product-sustaining (number of products)	100600	50300		1		50300
Other (organization-sustaining costs)	60500	NA
Total manufacturing overhead cost	510445					$249906

Product Margin calculation

Working			B300	T500	Total
A		Direct material	400000	162000	562000
B		Direct labor	121000	42300	163300
C (as above)		Overhead allocated	200039	249906	449945
D		Advertising cost traceable	56000	104000	160000
E=A+B+C+D		Total cost	777039	558206	1335245
F		Units	60300	12700	73000
G		SP per unit	21	39
H=FxG		Sales Rvenue	1266300	495300	1761600
I=H-E		Product margin (loss)	$489261	$(62906)	$426355

• Requirement 3

	B300		T500		Total
	Amount $	% of	Amount $	% of	Amount $
Traditional Cost System
Direct materials	400000	44.46%	162000	48.11%	562000
Direct labor	121000	13.45%	42300	12.56%	163300
Manufacturing overhead	378730	42.09%	132399	39.32%	511129
Total cost assigned to products	899730	100.00%	336699	100.00%	1236429
Selling and administrative					620000
Total cost	899730	100.00%	336699	100.00%	1856429
	B300		T500		Total
		% of		% of
	Amount $	Total Amount	Amount $	Total Amount	Amount $
Activity-Based Costing System
Direct costs:
Direct materials	400000	51.48%	162000	29.02%	562000
Direct labor	121000	15.57%	42300	7.58%	163300
Advertising expense	56000	7.21%	104000	18.63%	160000
Indirect costs:
Machining	119079	15.32%	82006	14.69%	201085
Setups	30660	3.95%	117600	21.07%	148260
Product sustaining	50300	6.47%	50300	9.01%	100600
Total cost assigned to products	777039	100.00%	558206	100.00%	1335245
Costs not assigned to products:
Other (sustaining cost)					60500
Selling and administrative					460000
Total cost	$777039	100.00%	$558206	100.00%	$1855745