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 below:

Hi-Tek Manufacturing Inc. Income Statement
Sales	$	2,100,000
Cost of goods sold		1,600,000
Gross margin		500,000
Selling and administrative expenses		550,000
Net operating loss	$	(50,000)

Hi-Tek produced and sold 70,000 units of B300 at a price of $20 per unit and 17,500 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	$	436,300	$	251,700	$	688,000
Direct labor	$	200,000	$	104,000		304,000
Manufacturing overhead						608,000
Cost of goods sold					$	1,600,000

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 $100,000 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		Activity
Activity Cost Pool (and Activity Measure)	Overhead		B300	T500	Total
Machining (machine-hours)	$	213,500	90,000	62,500	152,500
Setups (setup hours)		157,500	75	300	375
Product-sustaining (number of products)		120,000	1	1	2
Other (organization-sustaining costs)		117,000	NA	NA	NA
Total manufacturing overhead cost	$	608,000

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. (Negative product margins should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places.)

      

3.	Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answer to 1 decimal place. (i.e. .1234 should be entered as 12.3))

      

      

Answer 1

Traditional costing system
	B300		T500
	Amount		Amount		Total amount
Direct labour	$200,000	65.8%	$104,000	34.2%	$304,000
Direct material	$436,300	63.4%	$251,700	36.6%	$688,000
manufacturing overhead ($608000/304000*200000 or 104000)	$400,000	65.8%	$208,000	34.2%	$608,000
Total cost assigned to product	$1,036,300		$563,700		$1,600,000
Selling and administrative					$550,000
Total cost					$2,150,000
Activity based costing system
	B300		T500
	Amount		Amount		Total amount
Direct cost
Direct material	$436,300	63.4%	$251,700	36.6%	$688,000
Direct labour	$200,000	65.8%	$104,000	34.2%	$304,000
Advertising expense	$50,000	33.3%	$100,000	66.7%	$150,000
Indirect cost
machine ($213500/(90000+62500)*90000 or 62500)	$126,000	59.0%	$87,500	41.0%	$213,500
set ups ($157500/375*75 or 375)	$31,500	20.0%	$126,000	80.0%	$157,500
product sustaining ($120000/2*1)	$60,000	50.0%	$60,000	50.0%	$120,000
Total cost assigned to product	$903,800		$729,200		$1,633,000
Selling and administrative ($550000-$150000)					$400,000
Others					$117,000
					$2,150,000