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	$	1,714,000
Cost of goods sold		1,236,776
Gross margin		477,224
Selling and administrative expenses		640,000
Net operating loss	$	(162,776	)

Hi-Tek produced and sold 60,500 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	$	400,500	$	162,700	$	563,200
Direct labor	$	120,300	$	42,500		162,800
Manufacturing overhead						510,776
Cost of goods sold					$	1,236,776

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 $102,000 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)	$	211,416		90,800	62,400	153,200
Setups (setup hours)		138,160		74	240	314
Product-sustaining (number of products)		101,000		1	1	2
Other (organization-sustaining costs)		60,200		NA	NA	NA
Total manufacturing overhead cost	$	510,776

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

PMOH Rate =	Estimated total mfg. cost / Estimated total DL $
PMOH Rate =	$510,776	/	$162,800	$3	per DL$

	B300	T500	Total
Sales	$1,210,000	$504,000	$1,714,000
Direct materials	$400,500	$162,600	$563,100
Direct labor	120,300	42,500	162,800
Manufacturing overhead applied	377,435	133,341	510,776
Total manufacturing costs	$898,235	$338,441	$1,236,676
Product margin (Traditional Gross Margin)	$311,765	$165,559	$477,324

2

	B300	T500	Total
Sales	$1,210,000	$504,000	$1,714,000
Direct materials	$400,500	$162,600	$563,100
Direct labor	120,300	42,500	162,800
Advertising expense	51,000	102,000	153,000
MOH assigned (2nd Stage Allocations)
Machining pool	125,304	86,112	211,416
Setup pool	32,560	105,600	138,160
Product sustaining	50,500	50,500	101,000
Total costs assigned	$780,164	$549,312	$1,329,476
Product margin (ABC)	$429,836	($45,312)	$384,524

Traditional Costing	B300	%	T500	%	Total
Sales	$1,210,000	100.00%	$504,000	100.00%	$1,714,000
Direct materials	$400,500	33.10%	$162,600	32.26%	$563,100
Direct labor	120,300	9.94%	42,500	8.43%	162,800
Manufacturing overhead applied	377,435	31.19%	133,341	26.46%	510,776
Total manufacturing costs	$898,235	74.23%	$338,441	67.15%	$1,236,676
Product margin (Traditional)	$311,765	25.77%	$165,559	32.85%	$477,324
Selling & administrative					640,000
Net operating costs					($162,676)
Note: Total costs accounted for					$1,876,676

ABC Costing	B300		T500		Total
Sales	$1,210,000	100%	$504,000	100%	$1,714,000
Direct materials	$400,500	33.10%	$162,600	32.26%	$563,100
Direct labor	120,300	9.94%	42,500	8.43%	$162,800
Advertising expense (traced)	51,000	4.21%	102,000	20.24%	153,000
Mfg. Overhead assigned
Machining pool	125,304	10.36%	86,112	17.09%	211,416
Setup pool	32,560	2.69%	105,600	20.95%	138,160
Product sustaining	50,500	4.17%	50,500	10.02%	101,000
Total costs assigned	$780,164	64.48%	$549,312	108.99%	$1,329,476
Product margin (ABC)	$429,836	35.52%	($45,312)	-8.99%	$384,524
Selling & Administrative (Indirect)			487,000
Organizational Sustaining Costs			60,200		92,800
Net operating income			($162,676)
Note: Total costs accounted for			$1,876,676
Difference in Product Margins	$118,071	($210,871)			($92,800)