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 $ 1,712,000 Cost of goods sold 1,224,850 Gross margin 487,150 Selling and administrative expenses 620,000 Net operating loss $ (132,850 ) Hi-Tek produced and sold 60,200 units of B300 at a price of $20 per unit and 12,700 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 $ 162,700 $ 563,300 Direct labor $ 121,000 $ 42,000 163,000 Manufacturing overhead 498,550 Cost of goods sold $ 1,224,850 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $60,000 and $102,000 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) $ 207,090 90,500 62,900 153,400 Setups (setup hours) 129,360 78 230 308 Product-sustaining (number of products) 101,400 1 1 2 Other (organization-sustaining costs) 60,700 NA NA NA Total manufacturing overhead cost $ 498,550 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

1)	predetermined overhead rate
	total estimated manufacturing overhead/total estimated direct labor dollars
	498550/163000
	3.06
	product margin using traditional appraoch
					B300	T500	total
	sales				1204000	508000	1712000
	less:Expenses
	direct materials				400600	162700	563300
	direct labor				121000	42000	163000
	manufacturing OH applied @3.06				370089	128461	498550
	total manufacturing cost				891689	333161	1224850
	product margin				312311	174839	487150	answer
2)	ABC activity based
	Activity rates
					(a)	(b)	c=a/b
	Activity cost pools				total cost	total	Activity rate
						activity
	machining				207,090	153,400	1.35	per machine hour
	Setups				129,360	308	420	per setup hour
	product sustaining				101,400	2	50700	per product
	product margin under ABC accounting
					B300	T500	total
	sales				1204000	508000	1712000
	less:Expenses
	direct materials				400600	162700	563300
	direct labor				121000	42000	163000
	Advertising expense				60,000	102,000	162000
	manufacturing overhead assigned
	machining				122175	84915	207090
	Setups				32760	96600	129360
	product sustaining				50700	50700	101400
	total cost				787,235	538,915	1326150
	product margin				416765	-30915	385850
	Traditional cost system			B        300		T -500
3)					% of total		% of total	Total
				amount	amount	amount	amount	amount
	Traditional cost system
	Direct materials			400600	71.1%	162700	28.9%	563300
	direct labor			121000	74.2%	42000	25.8%	163000
	manufacturing overhead			370089	74.2%	128461	25.8%	498550
	total cost assigned to products							1224850
	selling & administrative cost							620,000
	total cost.							1844850
				B        300		T -500
					% of total		% of total	Total
				amount	amount	amount	amount	amount
	ABC based costing system
	Direct costs
	direct materials			400600	71.1%	162700	28.9%	563300
	direct labor			121000	74.2%	42000	25.8%	163000
	Advertising expense			60,000	37.0%	102,000	63.0%	162000
	Indirect costs:
	machining			122175	59.0%	84915	41.0%	207090
	Setups			32760	25.3%	96600	74.7%	129360
	product sustaining			50700	50.0%	50700	50.0%	101400
	total cost assigned to products			787235		538915		1326150
	cost not assigned to products
	Selling & administrative expense							458,000
	other							60,700
	total cost.							1844850