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	$	1,704,000
Cost of goods sold		1,251,609
Gross margin		452,391
Selling and administrative expenses		610,000
Net operating loss	$	(157,609	)

Hi-Tek produced and sold 60,000 units of B300 at a price of $20 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	$	400,600	$	163,000	$	563,600
Direct labor	$	120,600	$	42,800		163,400
Manufacturing overhead						524,609
Cost of goods sold					$	1,251,609

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $51,000 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)	$	212,809		90,300	62,800	153,100
Setups (setup hours)		150,000		75	300	375
Product-sustaining (number of products)		101,000		1	1	2
Other (organization-sustaining costs)		60,800		NA	NA	NA
Total manufacturing overhead cost	$	524,609

Required:

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.

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2. Compute 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 other answers to the nearest whole dollar amounts.)

	B300 T500 Total % of % of Amount Amount Amount Traditional Cost System % % % % % % Total cost assigned to products $0 $0 $0 Total cost $0 B300 T500 Total % of % of Amount Total Amount Amount Total Amount Amount Activity-Based Costing System Direct costs: % % % % % % Indirect costs: % % % % % % Total cost assigned to products $0 $0 0 Costs not assigned to products: Total cost $0

Answer 1

	1. Compute the product margins for the B300 and T500 under the company’s traditional costing system.
		Predetermined OH Rate = Estimated OH/DL dollars	(524609/163400)	321.1%
		Particulars	B300	T500	Total
	A	Sales	1,200,000	504,000	1,704,000
			(60000 X 20)	(12600 X 40)
		Cost of Goods Sold:
	B	Direct Material	400,600	163,000	563,600
	C	Direct Labour	120,600	42,800	163,400
	D	Manufacturing OverHeads	387,126	137,388	524,514
			(120600 X321.06%)	(137388 X321.06%)
	E=B+C+D	Cost of Goods Sold	908,326	343,188	1,251,514
	F=A-E	Product Margin	291,674	160,812	452,486
	2. Compute the product margins for B300 and T500 under the activity-based costing system.
		Activity Cost Pool (and Activity Measure)	Manufacturing OH	Activity	Activity rate
			A	B	C=A/B
		Machining (machine-hours)	212,809	153,100	1.39
		Setups (setup hours)	150,000	375	400
		Product-sustaining (number of products)	101,000	2.0	50,500
			B300	T500	Total
	A	Sales	1,200,000	504,000	1,704,000
		Cost of Goods Sold:
	B	Direct Material	400,600	163,000	563,600
	C	Direct Labor	120,600	42,800	163,400
	D	Machining (machine-hours)	125,517	87,292	212,809
			(90300 X 1.39)	(62800 X 1.39)
	E	Setups (setup hours)	30,000	120,000	150,000
			(75 X400)	(300 X400)
	F	Product-sustaining (number of products)	50,500	50,500	101,000
			(50500 X1)	(50500 X1)
	G	Advertising	51,000	105,000	156,000
	H=(B+C+D+E+F+G)	COGS	778,217	568,592	1,346,809
	I=A-H	Product Margin	421,783	(64,592)	357,191
	3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.
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