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 below:

Hi-Tek Manufacturing Inc.
Income Statement
Sales $ 1,699,200
Cost of goods sold 1,223,420
Gross margin 475,780
Selling and administrative expenses 590,000
Net operating loss $ (114,220)

Hi-Tek produced and sold 60,000 units of B300 at a price of $20 per unit and 12,800 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 $ 400,400 $ 162,700 $ 563,100
Direct labor $ 120,700 $ 42,100 162,800
Manufacturing overhead 497,520
Cost of goods sold $ 1,223,420

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $59,000 and $109,000 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 Activity
Activity Cost Pool (and Activity Measure) Overhead B300 T500 Total
Machining (machine-hours) $ 214,340 90,800 62,300 153,100
Setups (setup hours) 121,880 77 200 277
Product-sustaining (number of products) 100,400 1 1 2
Other (organization-sustaining costs) 60,900 NA NA NA
Total manufacturing overhead cost $ 497,520

Compute the product margins for the B300 and T500 under the company’s traditional costing system. (Do not round your overhead rate. Round your other intermediate and final answers to the nearest whole number.)

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.)

Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Do not round your overhead rate. Round your other intermediate calculations and final answers to the nearest whole number. Round your "Percentage" answer to 1 decimal place. (i.e. .1234 should be entered as 12.3))

Answer 1

1) Traditional costing :	B300	T500	Total
DM	400400	162700	563100
DL	120700	42100	162800
Manufacturing overhead	368861	128659	497520
(497520/162800=3.056)
COGS	889961	333459	1223420
Sales	1200000	499200	1699200
Margin	310039	165741	475780
2) ABC COSTING:
allocation of overhead:	Total	B300	T500
Machining	214340	214340*90800/153100) =127120	214340*62300/153100) =87220
Setups	121880	121880*77/277=33880	121880*200/277=88000
Product-sustaining	100400	50200	50200
Other	60900	0	0
Total	497520	211200	225420
Product Margin:
	B300	T500	Total
DM	400400	162700	563100
DL	120700	42100	162800
Manufacturing overhead	211200	225420	436620
Manufacturing O/H -other	0	0	60900
COGS	732300	430220	1223420
Sales	1200000	499200	1699200
margin	467700	68980	475780
3) Comparison:
	B300	T500
Traditional Product margin	310039	165741
Abc Product margin	467700	68980
Difference	-157661	96761
Unallocated M. Overhead	60900
Total	-96761	96761