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 $ 1,708,000 Cost of goods sold 1,248,176 Gross margin 459,824 Selling and administrative expenses 570,000 Net operating loss $ (110,176 ) Hi-Tek produced and sold 60,400 units of B300 at a price of $20 per unit and 12,500 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 $ 400,600 $ 162,500 $ 563,100 Direct labor $ 120,000 $ 42,900 162,900 Manufacturing overhead 522,176 Cost of goods sold $ 1,248,176 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $57,000 and $106,000 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) $ 208,896 90,700 62,900 153,600 Setups (setup hours) 153,080 76 280 356 Product-sustaining (number of products) 100,200 1 1 2 Other (organization-sustaining costs) 60,000 NA NA NA Total manufacturing overhead cost $ 522,176 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

Solution 1:

Predetermined overhead rate = Estimated overhead / Estimated direct labor cost = $522,176/$162,900 = $3.2055 per direct labor dollar

Computation of Product Margin - Traditional Costing System
Particulars	B300	T500	Total
Sales (B300 - 60,400*$20, T500 - 12500*$40)	$1,208,000	$500,000	$1,708,000
Direct material	$400,600	$162,500	$563,100
Direct labor	$120,000	$42,900	$162,900
Manufacturing overhead (Direct labor * $3.04786)	$384,660	$137,516	$522,176
Product Margin	$302,740	$157,084	$459,824

Solution 2:

Determination of activity rate for each activity & allocation of overhead
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	B300		T500
					Usage	Allocated Costs	Usage	Allocated Costs
Machining	$208,896.00	Machine hours	153600	$1.36	90700	$123,352.00	62900	$85,544.00
Setups	$153,080.00	Setup hours	356	$430.00	76	$32,680.00	280	$120,400.00
Product sustaining	$100,200.00	Number of products	2	$50,100.00	1	$50,100.00	1	$50,100.00
Other	$60,000.00	No allocation
Total	$522,176.00					$206,132.00		$256,044.00

Computation of Product Margin - Activity based Costing System
Particulars	B300	T500	Total
Sales (B300 - 60,400*$20, T500 - 12500*$40)	$1,208,000	$500,000	$1,708,000
Direct material	$400,600	$162,500	$563,100
Direct labor	$120,000	$42,900	$162,900
Allocated Manufacturing overhead	$206,132.00	$256,044.00	$462,176
Advertising Expense	$57,000.00	$106,000.00	$163,000.00
Product Margin	$424,268.00	-$67,444.00	$356,824.00

Solution 3:

Quantity comparison of traditional cost assignment
Particulars	B300		T500		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Material Cost	$400,600	71.1%	$162,500	28.9%	$563,100
Direct Labor Cost	$120,000	73.7%	$42,900	26.3%	$162,900
Manufacturing Overhead cost	$384,660	73.7%	$137,516	26.3%	$522,176
Total cost assigned to products	$905,260		$342,916		$1,248,176
Total cost not assigned to product:
Selling and adminstrative Expenses					$570,000.00
Total Cost					$1,818,176

Quantity comparison of Activity Based cost assignment
Particulars	B300		T500		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Cost:
Material Cost	$400,600	71.1%	$162,500	28.9%	$563,100
Labor Cost	$120,000	73.7%	$42,900	26.3%	$162,900
Advertising Expense	$57,000	35.0%	$106,000	65.0%	$163,000
Indirect Cost:
Machining	$123,352	59.0%	$85,544	41.0%	$208,896
Setups	$32,680	21.3%	$120,400	78.7%	$153,080
Product sustaining	$50,100	50.0%	$50,100	50.0%	$100,200
Total Cost Assigned to Products	$783,732		$567,444		$1,351,176
Cost not assigned to products:
Manufacturing					$60,000
Selling and administrative					$407,000
Total Cost					$1,818,176