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 $ 1,766,100 Cost of goods sold 1,228,700 Gross margin 537,400 Selling and administrative expenses 610,000 Net operating loss $ (72,600 ) Hi-Tek produced and sold 60,100 units of B300 at a price of $21 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 $ 400,400 $ 163,000 $ 563,400 Direct labor $ 120,600 $ 42,600 163,200 Manufacturing overhead 502,100 Cost of goods sold $ 1,228,700 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $50,000 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) $ 210,450 90,100 62,400 152,500 Setups (setup hours) 129,150 75 240 315 Product-sustaining (number of products) 102,000 1 1 2 Other (organization-sustaining costs) 60,500 NA NA NA Total manufacturing overhead cost $ 502,100 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) Overhead apportioned at traditional costing
on Direct Labor dollars:
	B300	T500	Total
Units produced & sold	60100	12600
Sales revenue	1262100	504000	1766100
Less:COGS:
DM	400400	163000	563400
DL	120600	42600	163200
Manuf. OH	371037	131063	502100
COGS	892037	336663	1228700
Gross Margin	370063	167337	537400
2) Overhead apportioned at activity-based costing :
	B300	T500	Total	Ratio
Units produced & sold	60100	12600
Sales revenue	1262100	504000	1766100
Less:COGS:
DM	400400	163000	563400
DL	120600	42600	163200
Manuf. OH:
Machining	124338	86112	210450	90100/152500 : 62400/152500
Setups	30750	98400	129150	75/315 : 240/315
Product-sustaining	51000	51000	102000	1/2 : 1/2
Other	NA	NA	60500	NA
total Manuf OH	206088	235512	502100
COGS	727088	441112	1228700
Gross Margin	535012	62888	537400
3) Quantitative comparison:
Costing method:
Traditional	370063	167337	537400
Activity-based	535012	62888	537400
Analysis	More apportioned	More apportioned
	under Traditional	under activity base