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	$	1,642,900
Cost of goods sold		1,223,872
Gross margin		419,028
Selling and administrative expenses		560,000
Net operating loss	$	(140,972	)

Hi-Tek produced and sold 60,400 units of B300 at a price of $19 per unit and 12,700 units of T500 at a price of $39 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	$	162,000	$	562,300
Direct labor	$	121,000	$	42,600		163,600
Manufacturing overhead						497,972
Cost of goods sold					$	1,223,872

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $56,000 and $103,000 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)	$	202,752		90,700	62,900	153,600
Setups (setup hours)		133,320		73	230	303
Product-sustaining (number of products)		101,000		1	1	2
Other (organization-sustaining costs)		60,900		NA	NA	NA
Total manufacturing overhead cost	$	497,972

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.

Compute the product margins for the B300 and T500 under the company’s traditional costing system. (Round your intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)

B300 T500 Total Product margin $0 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.) 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.) B300 T500 Total Product margin $0 Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answers to 1 decimal place and other answers to the nearest whole dollar amounts.) B300 T500 Total % of % of Amount Amount Amount Traditional Cost System % % % % % % Total cost assigned to products $0 $0 $0 Total cost $0 B300 T500 Total % of % of Amount Total Amount Amount Total Amount Amount Activity-Based Costing System Direct costs: % % % % % % Indirect costs: % % % % % % Total cost assigned to products $0 $0 0 Costs not assigned to products: Total cost $0

Answer 1

1. Computation of Product Margin , under Traditional Costing System
Traditional Costing System
Product Margin
	B300	T500	Total $
Sales	1147600	495300	1642900
Total Costs:
Direct Material	400300	162000	562300
Direct Labour	121000	42600	163600
Manufacturing Overhead	368304	129668	497972
	889604	334268	1223872
Product Margin	₹     2,57,996	₹    1,61,032	₹     4,19,028
Working notes: (i) Sales for B300 = 60,400units @$19
Sales for T500 = 12,700units @$39
(ii)Allocation of Manufacturing overhead on the basis of direct labour:
formula: (Total manufacturing overhead/Total direct labour dollars) * Direct labour
For B300 : (497972/163600)*121000
For T500 : (497972/163600)*42600
2. Computation of Product Margin , under Activity-based Costing System
Traditional Costing System
Product Margin
	B300	T500	Total $
Sales	1147600	495300	1642900
Total Costs:
Direct Material	400300	162000	562300
Direct Labour	121000	42600	163600
Manufacturing Overhead	2,02,344	2,34,728	437072
	723644	439328	1162972
Product Margin	$     4,23,956	$       55,972	$     4,79,928
Working notes: (i) Sales for B300 = 60,400units @$19
Sales for T500 = 12,700units @$39
(ii)Allocation of Manufacturing overhead will be done in the ratio of activities
	Manufacturing	Activity		Manufacturing overheads amount
Activity Cost Pool (and Activity Measure)	Overhead	B300	T500	B300	T500
Machining (machine-hours)	2,02,752	90,700	62,900	119724	83028
Setups (setup hours)	1,33,320	73	230	32120	101200
Product-sustaining (number of products)	1,01,000	1	1	50500	50500
Total	4,37,072			2,02,344	2,34,728
3. Comparison of the traditional and activity-based cost assignments
	B300		T500		Total $
	Amount	% of Total Amount	Amount	% of Total Amount
Traditional Cost System
Direct Material	400300	71.19%	162000	28.81%	562300
Direct Labour	121000	73.96%	42600	26.04%	163600
Manufacturing Overhead	368304	73.96%	129668	26.04%	497972
Total cost assigned to products	889604		334268		1223872
Total cost					1223872
	B300		T500		Total $
	Amount	% of Total Amount	Amount	% of Total Amount
Activity-Based Costing System
Direct costs:
Direct Material	400300	71.19%	162000	28.81%	562300
Direct Labour	121000	73.96%	42600	26.04%	163600
Advertising expenses	56000	35.22%	103000	64.78%	159000
Indirect costs:
Machining	119724	59.04%	83028	40.96%	202752
Setups	32120	24.09%	101200	75.91%	133320
Product-sustaining	50500	50%	50500	50%	101000
Total cost assigned to products	779644		542328		1321972
Costs not assigned to products:
Selling & administrative expenses					401000
other cost					60900
Total cost					1783872