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	$	1,693,500
Cost of goods sold		1,211,247
Gross margin		482,253
Selling and administrative expenses		590,000
Net operating loss	$	(107,747	)

Hi-Tek produced and sold 60,300 units of B300 at a price of $20 per unit and 12,500 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	$	400,100	$	162,900	$	563,000
Direct labor	$	120,700	$	42,000		162,700
Manufacturing overhead						485,547
Cost of goods sold					$	1,211,247

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 $107,000 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)	$	200,037		90,700	62,000	152,700
Setups (setup hours)		123,410		77	210	287
Product-sustaining (number of products)		101,800		1	1	2
Other (organization-sustaining costs)		60,300		NA	NA	NA
Total manufacturing overhead cost	$	485,547

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
	485547/162700
	2.984309
	product margin using traditional appraoch
					B300	T500	total
	sales				1206000	487500	1693500
	less:Expenses
	direct materials				400100	162900	563000
	direct labor				120700	42000	162700
	manufacturing OH applied @2.98				360206	125341	485547
	total manufacturing cost				881006	330241	1211247
	product margin				324994	157259	482253	answer
2)	ABC activity based
	Activity rates
					(a)	(b)	c=a/b
	Activity cost pools				total cost	total	Activity rate
						activity
	machining				200,037	152,700	1.31	per machine hour
	Setups				123,410	287	430	per setup hour
	product sustaining				101,800	2	50900	per product
	product margin under ABC accounting
					B300	T500	total
	sales				1206000	487500	1693500
	less:Expenses
	direct materials				400100	162900	563000
	direct labor				120700	42000	162700
	Advertising expense				57,000	107,000	164000
	manufacturing overhead assigned
	machining				118817	81220	200037
	Setups				33110	90300	123410
	product sustaining				50900	50900	101800
	total cost				780,627	534,320	1314947
	product margin				425373	-46820	378553
	Traditional cost system			B        300		T -500
3)					% of total		% of total	Total
				amount	amount	amount	amount	amount
	Traditional cost system
	Direct materials			400100	71.1%	162900	28.9%	563000
	direct labor			120700	74.2%	42000	25.8%	162700
	manufacturing overhead			360206	74.2%	125341	25.8%	485547
	total cost assigned to products							1211247
	selling & administrative cost							590,000
	total cost.							1801247
				B        300		T -500
					% of total		% of total	Total
				amount	amount	amount	amount	amount
	ABC based costing system
	Direct costs
	direct materials			400100	71.1%	162900	28.9%	563000
	direct labor			120700	74.2%	42000	25.8%	162700
	Advertising expense			57,000	34.8%	107,000	65.2%	164000
	Indirect costs:
	machining			118817	59.4%	81220	40.6%	200037
	Setups			33110	26.8%	90300	73.2%	123410
	product sustaining			50900	50.0%	50900	50.0%	101800
	total cost assigned to products			780627		534320		1314947
	cost not assigned to products
	Selling & administrative expense							426,000
	other							60,300
	total cost.							1801247