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	$	1,753,800
Cost of goods sold		1,217,372
Gross margin		536,428
Selling and administrative expenses		580,000
Net operating loss	$	(43,572	)

Hi-Tek produced and sold 60,300 units of B300 at a price of $21 per unit and 12,500 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	$	400,600	$	162,700	$	563,300
Direct labor	$	120,400	$	42,900		163,300
Manufacturing overhead						490,772
Cost of goods sold					$	1,217,372

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 $104,000 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)	$	202,752		90,800	62,800	153,600
Setups (setup hours)		126,420		71	230	301
Product-sustaining (number of products)		101,200		1	1	2
Other (organization-sustaining costs)		60,400		NA	NA	NA
Total manufacturing overhead cost	$	490,772

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 Revenue	$          1,266,300	$           487,500	$    1,753,800
Costs
Direct Material	$             400,600	$           162,700	$       563,300
Direct Labor	$             120,400	$             42,900	$       163,300
Overhead	$             361,843	$           128,929	$       490,772
Total Cost	$             882,843	$           334,529	$    1,217,372
Product Margin	$             383,457	$           152,971	$       536,428
Units	60300	12500
Product Margin per unit	$                    6.36	$               12.24

2.

	B300	T500	Total
Sales Revenue	$          1,266,300	$           487,500	$    1,753,800
Costs
Direct Material	$             400,600	$           162,700	$       563,300
Direct Labor	$             120,400	$             42,900	$       163,300
Advertising	$                56,000	$           104,000	$       160,000
Overhead
Machining	$             119,856	$             82,896	$       202,752
Setups	$                29,820	$             96,600	$       126,420
Product Sustaining	$                50,600	$             50,600	$       101,200
Total Cost	$             777,276	$           539,696	$    1,316,972
Product Margin	$             489,024	$           -52,196	$       436,828
Units	60300	12500
Product Margin per unit	$                    8.11	$                -4.18

Activity	Cost	Cost Driver		Cost per Cost driver
Machining	$             202,752	153600	Machine hours	$                1.32
Setups	$             126,420	301	Setups	$           420.00
Product Sustaining	$             101,200	2	Products	$      50,600.00
Total	$             430,372

3.

	B300		T500		Total
Traditional Cost System
Direct Material	$             400,600	71.12%	$       162,700	28.88%	$       563,300
Direct Labor	$             120,400	73.73%	$          42,900	26.27%	$       163,300
Overhead	$             361,843	73.73%	$       128,929	26.27%	$       490,772
Total Cost assigned to Products	$             882,843		$       334,529		$    1,217,372
Selling and administrative expense					$       580,000
Total Cost					$    1,797,372
ABC
Direct Costs
Direct Material	$             400,600	71.12%	$       162,700	28.88%	$       563,300
Direct Labor	$             120,400	73.73%	$          42,900	26.27%	$       163,300
Advertising	$                56,000	35.00%	$       104,000	65.00%	$       160,000
Indirect Costs
Machining	$             119,856	59.11%	$          82,896	40.89%	$       202,752
Setups	$                29,820	23.59%	$          96,600	76.41%	$       126,420
Product Sustaining	$                50,600	50.00%	$          50,600	50.00%	$       101,200
Total Cost assigned to Products	$             777,276		$       539,696		$    1,316,972
Costs not assigned to products
Selling and administrative expense					$       420,000
Other					$          60,400
Total Cost					$    1,797,372