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	$	1,699,300
Cost of goods sold		1,208,784
Gross margin		490,516
Selling and administrative expenses		590,000
Net operating loss	$	(99,484	)

Hi-Tek produced and sold 60,200 units of B300 at a price of $20 per unit and 12,700 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	$	400,300	$	162,300	$	562,600
Direct labor	$	120,300	$	42,200		162,500
Manufacturing overhead						483,684
Cost of goods sold					$	1,208,784

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $51,000 and $107,000 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)	$	209,884		90,200	63,000	153,200
Setups (setup hours)		113,200		73	210	283
Product-sustaining (number of products)		100,200		1	1	2
Other (organization-sustaining costs)		60,400		NA	NA	NA
Total manufacturing overhead cost	$	483,684

Required: (SHOW ALL WORK)

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. Compute the product margins for the B300 and T500 under the company’s traditional costing system.

	B300	T500	Total
Sales	1204000	495300	1699300
Less Manufacturing cost
Direct materials	4,00,300	1,62,300	5,62,600
Direct labor	1,20,300	42,200	1,62,500
Overhead Allocated	358075	125609	483684
Total manufacturing cost	8,78,675	3,30,109	12,08,784
Profit Margin	3,25,325	1,65,191	4,90,516

2. Compute the product margins for B300 and T500 under the activity-based costing system.

	B300	T500	Total
Sales	1204000	495300	1699300
Less Manufacturing cost
Direct materials	4,00,300	1,62,300	5,62,600
Direct labor	1,20,300	42,200	1,62,500
Machining	123574	86310	209884
Setups	29200	84000	113200
Product-sustaining	50100	50100	100200
Total manufacturing cost	7,23,474	4,24,910	11,48,384
Profit Margin	4,80,526	70,390	5,50,916

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.

Traditional Costt System	B300	% Total Amount	T500	% Total Amount	Total
Direct materials	4,00,300	71%	1,62,300	29%	5,62,600
Direct labor	1,20,300	74%	42,200	26%	1,62,500
Overhead Allocated	358075	74%	125609	26%	483684
Total Cost Assigned	8,78,675		3,30,109

Traditional Costt System	B300	% Total Amount	T500	% Total Amount	Total
Direct materials	4,00,300	71%	1,62,300	29%	5,62,600
Direct labor	1,20,300	74%	42,200	26%	1,62,500
Machining	123574	59%	86310	41%	209884
Setups	29200	26%	84000	74%	113200
Product-sustaining	50100	50%	50,100	50%	100200