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 $ 1,710,000 Cost of goods sold 1,235,260 Gross margin 474,740 Selling and administrative expenses 620,000 Net operating loss $ (145,260 ) Hi-Tek produced and sold 60,100 units of B300 at a price of $20 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 $ 400,500 $ 163,000 $ 563,500 Direct labor $ 120,300 $ 42,600 162,900 Manufacturing overhead 508,860 Cost of goods sold $ 1,235,260 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $55,000 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) $ 198,770 90,800 62,100 152,900 Setups (setup hours) 147,490 73 270 343 Product-sustaining (number of products) 101,600 1 1 2 Other (organization-sustaining costs) 61,000 NA NA NA Total manufacturing overhead cost $ 508,860 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

Computation of Product Margin as per Traditional Method of Costing
	B300	T500	Total
	Amount	Amount	Amount
Sales (1)	$12,02,000	$5,08,000	$17,10,000
Cost of Goods Sold:-
Direct materials	$4,00,500	$1,63,000	$5,63,500
Direct labor	$1,20,300	$42,600	$1,62,900
Manufacturing overhead applied ( 508860/162900*120300 or 42600)	$3,75,788	$1,33,072	$5,08,860
Total Cost of Goods Sold (2)	$8,96,588	$3,38,672	$12,35,260
Product Margin	$3,05,412	$1,69,328	$4,74,740
Computation of Product Margin as per ABCl Method of Costing
	B300	T500	Total
	Amount	Amount	Amount
sales (2)	$12,02,000	$5,08,000	$17,10,000
Cost of Goods Sold:-
Direct materials	$4,00,500	$1,63,000	$5,63,500
Direct labor	$1,20,300	$42,600	$1,62,900
Advertising expense	$55,000	$1,05,000	$1,60,000
Mfg. Overhead assigned
Machining pool (90800:62100)	$1,18,040	$80,730	$1,98,770
Setup pool(73:270)	$31,390	$1,16,100	$1,47,490
Product sustaining (600,112)	$85,618	$15,982	$1,01,600
Total Cost of goods Sold (2)	$8,10,848	$5,23,412	$13,34,260
Product Margin ( 1-2)	$3,91,152	-$15,412	$3,75,740

Quantititive Comparison

Traditional Method of Costing
	B300		T500		Total
	Amount		Amount		Amount
Direct materials	$4,00,500	71%	$1,63,000	29%	$5,63,500
Direct labor	$1,20,300	74%	$42,600	26%	$1,62,900
Manufacturing overhead applied ( 508860/162900*120300 or 42600)	$3,75,788	74%	$1,33,072	26%	$5,08,860
Total Manufacturing Cost	$8,96,588	73%	$3,38,672	27%	$12,35,260
Selling Expnese					$6,20,000
Total Cost					$18,55,260

ABCl Method of Costing
	B300		T500		Total
	Amount		Amount		Amount
Direct materials	$4,00,500	71%	$1,63,000	29%	$5,63,500
Direct labor	$1,20,300	74%	$42,600	26%	$1,62,900
Advertising expense	$55,000	34%	$1,05,000	66%	$1,60,000
Mfg. Overhead assigned
Machining pool (90800:62100)	$1,18,040	59%	$80,730	41%	$1,98,770
Setup pool(73:270)	$31,390	21%	$1,16,100	79%	$1,47,490
Product sustaining (600,112)	$85,618	84%	$15,982	16%	$1,01,600
Total Cost assigned to Prodcut	$8,10,848	61%	$5,23,412	39%	$13,34,260
Organization Suistaining Cost					61000
Selling Expnese					$6,20,000
Total Cost					$20,15,260
Percentage should be calculated for line item wise.