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		1,229,861
Gross margin		480,139
Selling and administrative expenses		630,000
Net operating loss	$	(149,861	)

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	$	400,700	$	162,800	$	563,500
Direct labor	$	120,900	$	42,100		163,000
Manufacturing overhead						503,361
Cost of goods sold					$	1,229,861

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $56,000 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)	$	200,561		90,900	62,200	153,100
Setups (setup hours)		140,700		75	260	335
Product-sustaining (number of products)		101,800		1	1	2
Other (organization-sustaining costs)		60,300		NA	NA	NA
Total manufacturing overhead cost	$	503,361

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
	503361/163000
	3.088104
	product margin using traditional appraoch
					B300	T500	total
	sales				1202000	508000	1710000
	less:Expenses
	direct materials				400700	162800	563500
	direct labor				120900	42100	163000
	manufacturing OH applied @3.09				373352	130009	503361
	total manufacturing cost				894952	334909	1229861
	product margin				307048	173091	480139	answer
2)	ABC activity based
	Activity rates
					(a)	(b)	c=a/b
	Activity cost pools				total cost	total	Activity rate
						activity
	machining				200,561	153,100	1.31	per machine hour
	Setups				140,700	335	420	per setup hour
	product sustaining				101,800	2	50900	per product
	product margin under ABC accounting
					B300	T500	total
	sales				1202000	508000	1710000
	less:Expenses
	direct materials				400700	162800	563500
	direct labor				120900	42100	163000
	Advertising expense				56,000	102,000	158000
	manufacturing overhead assigned
	machining				119079	81482	200561
	Setups				31500	109200	140700
	product sustaining				50900	50900	101800
	total cost				779,079	548,482	1327561
	product margin				422921	-40482	382439
	Traditional cost system			B        300		T -500
3)					% of total		% of total	Total
				amount	amount	amount	amount	amount
	Traditional cost system
	Direct materials			400700	71.1%	162800	28.9%	563500
	direct labor			120900	74.2%	42100	25.8%	163000
	manufacturing overhead			373352	74.2%	130009	25.8%	503361
	total cost assigned to products							1229861
	selling & administrative cost							630,000
	total cost.							1859861
				B        300		T -500
					% of total		% of total	Total
				amount	amount	amount	amount	amount
	ABC based costing system
	Direct costs
	direct materials			400700	71.1%	162800	28.9%	563500
	direct labor			120900	74.2%	42100	25.8%	163000
	Advertising expense			56,000	35.4%	102,000	64.6%	158000
	Indirect costs:
	machining			119079	59.4%	81482	40.6%	200561
	Setups			31500	22.4%	109200	77.6%	140700
	product sustaining			50900	50.0%	50900	50.0%	101800
	total cost assigned to products			779079		548482		1327561
	cost not assigned to products
	Selling & administrative expense							472,000
	other							60,300
	total cost.							1859861