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	$	1,774,100
Cost of goods sold		1,243,873
Gross margin		530,227
Selling and administrative expenses		640,000
Net operating loss	$	(109,773	)

Hi-Tek produced and sold 60,100 units of B300 at a price of $21 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	$	400,100	$	162,200	$	562,300
Direct labor	$	120,200	$	42,000		162,200
Manufacturing overhead						519,373
Cost of goods sold					$	1,243,873

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 $101,000 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)	$	212,253		90,400	62,300	152,700
Setups (setup hours)		145,320		76	270	346
Product-sustaining (number of products)		101,400		1	1	2
Other (organization-sustaining costs)		60,400		NA	NA	NA
Total manufacturing overhead cost	$	519,373

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

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Part 1
		B300		T500		Total
Sales			$1,262,100		$      512,000		$ 1,774,100
Less: Cost of Goods Sold
Direct Material		$     400,100		$      162,200		$   562,300
Direct Labor		$     120,200		$        42,000		$   162,200
Manufacturing Overhead	$519,373/$162,200*Direct Labor Cost	$     384,887	$ -905,187	$      134,486	$    -338,686	$   519,373	$-1,243,873
Product Margin			$   356,913		$      173,314		$     530,227
Less: Traceable Expense
Selling and Admin			$    -57,000		$    -101,000		$   -158,000
Net Product Margin			$   299,913		$        72,314		$     372,227
Part 2
		B300		T500		Total
Sales			$1,262,100		$      512,000		$ 1,774,100
Less: Cost of Goods Sold
Direct Material		$     400,100		$      162,200		$   562,300
Direct Labor		$     120,200		$        42,000		$   162,200
Manufacturing Overhead
Machining (machine-hours)		$     125,656		$        86,597		$   212,253
Setups (setup hours)		$        31,920		$      113,400		$   145,320
Product-sustaining (number of products)		$        50,700	$ -728,576	$        50,700	$    -454,897	$   101,400	$-1,183,473
Product Margin			$   533,524		$        57,103		$     590,627
Less: Traceable Expense
Selling and Admin			$    -57,000		$    -101,000		$   -158,000
Net Product Margin			$   476,524		$      -43,897		$     432,627
	A	B	C	B+C=D	A/D=E	E*B	E*C
Activity Cost Pool (and Activity Measure)	Amount	B300	T500	Total	Activity Rate	B300	T500
Machining (machine-hours)	$                                                 212,253	90,400	62,300	152,700	$            1.39	$   125,656	$       86,597
Setups (setup hours)	$                                                 145,320	76	270	346	$        420.00	$     31,920	$     113,400
Product-sustaining (number of products)	$                                                 101,400	1	1	2	$ 50,700.00	$     50,700	$       50,700
Other (organization-sustaining costs)	$                                                   60,400
Total manufacturing overhead cost	$                                                 519,373					$   208,276	$     250,697
Part 3
Traditional		B300		T500		Total
		Amount	Percentage	Amount	Percentage
Direct Material		$     400,100	$             71	$      162,200	$               29	$   562,300
Direct Labor		$     120,200	$             74	$        42,000	$               26	$   162,200
Manufacturing Overhead		$     384,887	$             74	$      134,486	$               26	$   519,373
Total Cost Assigned to Product		$     905,187	$             73	$      338,686	$               27	$1,243,873
Selling and Admin		$        57,000	$             36	$      101,000	$               64	$   158,000
Total Cost		$     962,187	$             69	$      439,686	$               31	$1,401,873
Activity		B300		T500		Total
		Amount	Percentage	Amount	Percentage
Direct Material		$     400,100	$             71	$      162,200	$               29	$   562,300
Direct Labor		$     120,200	$             74	$        42,000	$               26	$   162,200
Machining (machine-hours)		$     125,656	$             59	$        86,597	$               41	$   212,253
Setups (setup hours)		$        31,920	$             22	$      113,400	$               78	$   145,320
Product-sustaining (number of products)		$        50,700	$             50	$        50,700	$               50	$   101,400
Total Cost Assigned to Product		$     728,576	$             62	$      454,897	$               38	$1,183,473
Selling and Admin		$        57,000	$             36	$      101,000	$               64	$   158,000
Total Cost		$     785,576	$             59	$      555,897	$               41	$1,341,473