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	$	1,653,700
Cost of goods sold		1,241,595
Gross margin		412,105
Selling and administrative expenses		560,000
Net operating loss	$	(147,895	)

Hi-Tek produced and sold 60,300 units of B300 at a price of $19 per unit and 12,700 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	$	400,800	$	162,300	$	563,100
Direct labor	$	120,100	$	42,800		162,900
Manufacturing overhead						515,595
Cost of goods sold					$	1,241,595

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 $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)	$	206,955		90,900	62,400	153,300
Setups (setup hours)		147,840		76	260	336
Product-sustaining (number of products)		100,400		1	1	2
Other (organization-sustaining costs)		60,400		NA	NA	NA
Total manufacturing overhead cost	$	515,595

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.

Please help with ALL parts

Answer 1

1)	predetermined overhead rate
	total estimated manufacturing overhead/total estimated direct labor dollars
	515,595/162900
	3.165101
	product margin using traditional appraoch
					B300	T500	total
	sales				1145700	508000	1653700
	less:Expenses
	direct materials				400800	162300	563100
	direct labor				120100	42800	162900
	manufacturing OH applied @3.09				380129	135466	515595
	total manufacturing cost				901029	340566	1241595
	product margin				244671	167434	412105	answer
2)	ABC activity based
	Activity rates
					(a)	(b)	c=a/b
	Activity cost pools				total cost	total	Activity rate
						activity
	machining				206,955	153,300	1.35	per machine hour
	Setups				147,840	336	440	per setup hour
	product sustaining				100,400	2	50200	per product
	product margin under ABC accounting
					B300	T500	total
	sales				1145700	508000	1653700
	less:Expenses
	direct materials				400800	162300	563100
	direct labor				120100	42800	162900
	Advertising expense				52,000	104,000	156000
	manufacturing overhead assigned
	machining				122715	84240	206955
	Setups				33440	114400	147840
	product sustaining				50200	50200	100400
	total cost				779,255	557,940	1337195
	product margin				366445	-49940	316505
	Traditional cost system			B        300		T -500
3)					% of total		% of total	Total
				amount	amount	amount	amount	amount
	Traditional cost system
	Direct materials			400800	71.2%	162300	28.8%	563100
	direct labor			120100	73.7%	42800	26.3%	162900
	manufacturing overhead			380129	73.7%	135466	26.3%	515595
	total cost assigned to products							1241595
	selling & administrative cost							560,000
	total cost.							1801595
				B        300		T -500
					% of total		% of total	Total
				amount	amount	amount	amount	amount
	ABC based costing system
	Direct costs
	direct materials			400800	71.2%	162300	28.8%	563100
	direct labor			120100	73.7%	42800	26.3%	162900
	Advertising expense			52,000	33.3%	104,000	66.7%	156000
	Indirect costs:
	machining			122715	59.3%	84240	40.7%	206955
	Setups			33440	22.6%	114400	77.4%	147840
	product sustaining			50200	50.0%	50200	50.0%	100400
	total cost assigned to products			779255		557940		1337195
	cost not assigned to products
	Selling & administrative expense							404,000
	other							60,400
	total cost.							1801595