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

Part 1
	Plantwide Overhead Rate =$490,772 / $163,300 =$3.005339865 per $ of direct labor
	Computation of Product Margin
		B300	T500	Total
	Sales	$                                                1,266,300	$                                    487,500	$                                  1,753,800
	Less:Direct materials	$                                                   400,600	$                                    162,700	$                                     563,300
	Less:Direct labor	$                                                   120,400	$                                      42,900	$                                     163,300
	Less:Manufacturing Overhead	$                                                   361,843	$                                    128,929	$                                     490,772
	Less:Allocated Selling & administrative expenses	$                                                     56,000	$                                    104,000	$                                     160,000
	Product Margin	$                                                   327,457	$                                      48,971	$                                     376,428
	Less:Common Selling & administrative expenses			$                                     420,000
	Net Income			$                                     -43,572
Part 2
	Computation of ABC rate
	Activity	OH Costs(Col 1)	No. of activity base(Col 2)	Activity Rate(Col 1 / Col 2)
	Machining	$                                                   202,752	153,600	$                                           1.32	per machine hours
	Setups	$                                                   126,420	301	$                                       420.00	per setup hours
	Product-Sustaining	$                                                   101,200	2	$                                  50,600.00	per product
	Total Cost	$                                                   430,372
		B300	T500
		Activity Based usage	Activity Based usage*ABC rate	Activity Based usage	Activity Based usage*ABC rate
	Machining	90800	$                                    119,856	62800	$                                      82,896
	Setups	71	$                                      29,820	230	$                                      96,600
	Product-Sustaining	1	$                                      50,600	1	$                                      50,600
	Total Overhead Cost allocated		$                                    200,276		$                                    230,096
	Computation of Product Margin
		B300	T500	Total
	Sales	$                                                1,266,300	$                                    487,500	$                                  1,753,800
	Less:Direct materials	$                                                   400,600	$                                    162,700	$                                     563,300
	Less:Direct labor	$                                                   120,400	$                                      42,900	$                                     163,300
	Less:Allocated Manufacturing Overhead	$                                                   200,276	$                                    230,096	$                                     430,372
	Less:Allocated Selling & administrative expenses	$                                                     56,000	$                                    104,000	$                                     160,000
	Product Margin	$                                                   489,024	$                                     -52,196	$                                     436,828
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