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	$	1,649,700
Cost of goods sold		1,232,216
Gross margin		417,484
Selling and administrative expenses		560,000
Net operating loss	$	(142,516	)

Hi-Tek produced and sold 60,300 units of B300 at a price of $19 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	$	400,000	$	162,700	$	562,700
Direct labor	$	120,400	$	42,500		162,900
Manufacturing overhead						506,616
Cost of goods sold					$	1,232,216

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $59,000 and $101,000 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)	$	199,906		90,000	62,600	152,600
Setups (setup hours)		144,910		77	260	337
Product-sustaining (number of products)		101,400		1	1	2
Other (organization-sustaining costs)		60,400		NA	NA	NA
Total manufacturing overhead cost	$	506,616

Required:

1.

Compute the product margins for the B300 and T500 under the company’s traditional costing system. (Round your intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)

	B300 T500 Total Product margin $0

2.

Compute the product margins for B300 and T500 under the activity-based costing system. (Negative product margins should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places.)

	B300 T500 Total Product margin $0

3.

Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answers to 1 decimal place and and other answers to the nearest whole dollar amounts.)

	B300 T500 Total % of % of Amount Amount Amount Traditional Cost System % % % % % % Total cost assigned to products $0 $0 $0 Total cost $0 B300 T500 Total % of % of Amount Total Amount Amount Total Amount Amount Activity-Based Costing System Direct costs: % % % % % % Indirect costs: % % % % % % Total cost assigned to products $0 $0 0 Costs not assigned to products:    Total cost $0

Answer 1

1	Product margin:
					B300	T500
	Estimated annual production and sales					60300		12600
	Sales					1145700		504000
						(60300*19)		(12600*40)
	Less:
	Direct material cost				400000		162700
	Direct labor cost				120400		42500
	Manufacturing overhead (Note:1)				374444	894844	132175	337375
	Product margin					250856		166625
	Note:1-
	Manufacturing overhead is applied on the basis of direct labor hours
	Predetermined overhead rate=Estimated total manufacturing overhead/Estimated total direct labor dollars=506616/162900=$ 3.11 per direct labor dollar
	Manufacturing overhead allocated=Direct labor dollars*Predetermined overhead rate
	B300:
	Manufacturing overhead allocated=120400*3.11=$ 374444
	T500:
	Manufacturing overhead allocated=42500*3.11=$ 132175
2					B300	T500
	Estimated annual production and sales					60300		12600
	Sales					1145700		504000
						(60300*19)		(12600*40)
	Less:
	Direct material cost				400000		162700
	Direct labor cost				120400		42500
	Machining			(Note:2)	117900		82006
	Setups			(Note:2)	33110		111800
	Product sustaining			(Note:2)	50700	722110	50700	449706
	Product margin					423590		54294
	Note:2
	Activity rate=Estimated overhead cost/Total expected activity
	Activity cost pool			Estimated Overhead Cost	Total Expected Activity	Activity Rate
	Machining			199906	152600	1.31	Per machine hour
	Setups			144910	337	430	Per setups
	Product sustaining			101400	2	50700	Per product
	Overhead cost=Actual activity*Activity rate
					Actual activity	Overhead cost
	Activity cost pool		Activity Rate		B300	T500	B300	T500
			a		b	c	a*b	a*c
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