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	$	1,714,000
Cost of goods sold		1,248,178
Gross margin		465,822
Selling and administrative expenses		630,000
Net operating loss	$	(164,178	)

Hi-Tek produced and sold 60,100 units of B300 at a price of $20 per unit and 12,800 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	$	400,300	$	162,200	$	562,500
Direct labor	$	120,300	$	42,500		162,800
Manufacturing overhead						522,878
Cost of goods sold					$	1,248,178

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $53,000 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)	$	212,948		90,300	62,900	153,200
Setups (setup hours)		148,830		73	290	363
Product-sustaining (number of products)		101,000		1	1	2
Other (organization-sustaining costs)		60,100		NA	NA	NA
Total manufacturing overhead cost	$	522,878

Required: Please show all steps and math equations used to find the answers, please!

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 –

Product Margin Under Traditional Costing
	B300	T500
Units Sold	60,100	12,800
Unit Selling Price	$20	$40
Sales Value (Unit Sold x Unit Selling Price)	$1,202,000	$512,000
Product Cost
Direct Material Cost	$400,300	$162,200
Direct labor	$120,300	$42,500
Applied Manufacturing Overhead (Refer Note 1)	$37,456	$13,233
Total Product Cost	$558,056	$217,933
Product Margin (Sales Value - Product Cost)	$643,944	$294,067
/ Units Sold	60100	12800
Unit Product Margin	$10.71	$22.97
Note 1 -
Total Manufacturing Overheads	$522,878
Divided by: Direct labor dollars (Total)	$162,800
Overhead Rate (162,800 / 522,878 * 100)	31.135370%	of Direct Labor Cost
Applied Manufacturing Overheads	B300	T500
Direct Labor	$120,300	$42,500
x Overhead Rate	31.135370%	31.135370%
Applied Manufacturing Overheads	$37,456	$13,233

Part 2 –

Product Margin Under Activity Based Costing System
	B300	T500
Units Sold	60,100	12,800
Unit Selling Price	$20	$40
Sales Value (Unit Sold x Unit Selling Price)	$1,202,000	$512,000
Product Cost
Direct Material Cost	$400,300	$162,200
Direct labor	$120,300	$42,500
Applied Manufacturing Overhead (Refer Note 2)	$205,947	$256,831
Total Product Cost	$726,547	$461,531
Product Margin (Sales Value - Product Cost)	$475,453	$50,469
/ Units Sold	60100	12800
Unit Product Margin	$7.91	$3.94

Note 2 –

						B300		T500
Activity Cost Pool	Expected Overhead Costs (A)	Total Expected Activity (B)		Overhead Rate per Unit of Activity (C = A/B)		Activity Driver USAGE (H)	Overhead Assigned (C*H)	Activity Driver USAGE (E)	Overhead Assigned (C*E)
Machining	$212,948	153200	Machine Hours	$1.39	per MH	90300	$125,517	62900	$87,431
Setups	$148,830	363	Setup hours	$410.00	per setup hour	73	$29,930	290	$118,900
Product Sustaining	$101,000	2	Products	$50,500.00	per product	1	$50,500	1	$50,500
Other	$60,100					0	$0		$0
Total Overhead Assigned (O)	$522,878						$205,947		$256,831

Part 3 –

Quantitative Comparison of Traditional and Activity Based Cost assignments
	B300		T500		Total Amount
	Amount	% of Total Amount	Amount	% of Total Amount
Traditional Cost System
Direct materials	$400,300	71.16%	$162,200	28.84%	$562,500
Direct Labor	$120,300	73.89%	$42,500	26.11%	$162,800
Manufacturing Overhead	$37,456	73.89%	$13,233	26.11%	$50,688
Total Cost assigned to products	$558,056	71.92%	$217,933	28.08%	$775,988
Activity Based Costing System
Direct Costs:
Direct materials	$400,300	71.16%	$162,200	28.84%	$562,500
Direct Labor	$120,300	73.89%	$42,500	26.11%	$162,800
Indirect Costs:
Machining	$125,517	58.94%	$87,431	41.06%	$212,948
Setups	$29,930	20.11%	$118,900	79.89%	$148,830
Product Sustaining	$50,500	50.00%	$50,500	50.00%	$101,000
Total Cost assigned to products	$726,547	61.15%	$461,531	38.85%	$1,188,078
Costs not assigned to products
Other					$60,100
Total Cost					$1,248,178

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