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	$	1,697,300
Cost of goods sold		1,243,887
Gross margin		453,413
Selling and administrative expenses		610,000
Net operating loss	$	(156,587	)

Hi-Tek produced and sold 60,100 units of B300 at a price of $20 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	$	401,000	$	162,100	$	563,100
Direct labor	$	120,200	$	42,000		162,200
Manufacturing overhead						518,587
Cost of goods sold					$	1,243,887

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)	$	213,087		90,900	62,400	153,300
Setups (setup hours)		143,100		78	240	318
Product-sustaining (number of products)		102,000		1	1	2
Other (organization-sustaining costs)		60,400		NA	NA	NA
Total manufacturing overhead cost	$	518,587

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.

Overhead rate = 518587/ 162200 = $3.20

Computation of Product Margin - Traditional Costing System
Particulars	B300	T500	Total
Sales (B300 - 60,100*$20, T500 - 12700*$39)	$12,02,000	$4,95,300	$16,97,300
Direct material	$4,01,000	$1,62,100	$5,63,100
Direct labor	$1,20,200	$42,000	$1,62,200
Manufacturing overhead ($3.20 * Direct labor)	$3,84,640	$1,34,400	$5,19,040
Product Margin	$2,96,160	$1,56,800	$4,52,960

2.

Computation of Product Margin - Activity based Costing System
Particulars	B300	T500	Total
Sales (B300 - 60,100*$20, T500 - 12700*$39)	$12,02,000	$4,95,300	$16,97,300
Direct material	$4,01,000	$1,62,100	$5,63,100
Direct labor	$1,20,200	$42,000	$1,62,200
Allocated Manufacturing overhead	$2,12,451.00	$2,45,736.00	$4,58,187
Advertising Expense	$57,000.00	$1,06,000.00	$1,63,000.00
Product Margin	$4,11,349.00	-$60,536.00	$3,50,813.00

3.