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	$	1,635,200
Cost of goods sold		1,231,951
Gross margin		403,249
Selling and administrative expenses		610,000
Net operating loss	$	(206,751	)

Hi-Tek produced and sold 60,200 units of B300 at a price of $19 per unit and 12,600 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	$	400,200	$	162,900	$	563,100
Direct labor	$	120,500	$	42,400		162,900
Manufacturing overhead						505,951
Cost of goods sold					$	1,231,951

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $58,000 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)	$	210,021		90,900	62,400	153,300
Setups (setup hours)		133,730		71	240	311
Product-sustaining (number of products)		101,400		1	1	2
Other (organization-sustaining costs)		60,800		NA	NA	NA
Total manufacturing overhead cost	$	505,951

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.

	B300	T500	Total
Sales	1143800	491400	1635200
Cost of goods sold:
Direct material	400200	162900	563100
Direct labor	120500	42400	162900
Manufacturing overhead	374261	131690	505951
Total cost of goods sold	894961	336990	1231951
Product margins	248839	154410	403249

Working:

Manufacturing overhead	505951
Direct labor	162900
Predetermined overhead rate	311%	of direct labor

2.

	B300	T500	Total
Sales	1143800	491400	1635200
Cost of goods sold:
Direct material	400200	162900	563100
Direct labor	120500	42400	162900
Manufacturing overhead	250738	255213	505951
Total cost of goods sold	771438	460513	1231951
Product margins	372362	30887	403249

Working:

Activity cost pool	Cost	Cost driver units	Cost per unit
Machining (Machine hours)	210021	153300	$1.37
Setups (Setup hours)	133730	311	$430.00
Product Sustaining (Number of products)	101400	2	$50,700.00
Other (organiztion sustaining costs)
Activity cost pool	Cost per unit	B300		T500
		Units	Cost	Units	Cost
Machining (Machine hours)	$1.37	90900	124533	62400	85488
Setups (Setup hours)	$430.00	71	30530	240	103200
Product Sustaining (Number of products)	$50,700.00	1	50700	1	50700
Other (organisation sustaining costs)	37%		44975		15825
Total overhead cost of products			250738		255213
Since there is no base for other overhead we use the traditional direct labor cost as the basis
for asigining cost to the products.

3.

	B300			T500
	Traditional base	Activity based	Difference	Traditional base	Activity based	Difference
							Sales	1143800	1143800	0	491400	491400	0
Cost of goods sold:
Direct material	400200	400200	0	162900	162900	0
Direct labor	120500	120500	0	42400	42400	0
Manufacturing overhead	374261	250738	-123523	131690	255213	123523
Total cost of goods sold	894961	771438	-123523	336990	460513	123523
Product margins	248839	372362	123523	154410	30887	-123523