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	$	1,714,000
Cost of goods sold		1,231,554
Gross margin		482,446
Selling and administrative expenses		600,000
Net operating loss	$	(117,554	)

Hi-Tek produced and sold 60,500 units of B300 at a price of $20 per unit and 12,600 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	$	400,700	$	162,000	$	562,700
Direct labor	$	120,900	$	42,200		163,100
Manufacturing overhead						505,754
Cost of goods sold					$	1,231,554

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $58,000 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)	$	209,304		91,000	62,900	153,900
Setups (setup hours)		135,450		75	240	315
Product-sustaining (number of products)		100,600		1	1	2
Other (organization-sustaining costs)		60,400		NA	NA	NA
Total manufacturing overhead cost	$	505,754

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

			B300	T500	Total
		Units	60500	12600
		Sales Price	20	40
		Direct Material	400700	162200	562900		Total Manufacturing OH	505754
		Direct Labor	120900	42200	163100		Total Direct Labor Dollars	163100
		Manufacturing OH			505754		Overhead Per Dollars	3.10
		Cost of Goods Sold			1231754
	1		B300	T500			1.998347107	3.349206
		Sales Price	20.00	40.00			6.196640362	10.3855
		Less: Direct Material	6.62	12.87
		Less: Direct Labor	2.00	3.35
		Less: Maufacturing OH	6.20	10.39
		Product Margin	5.18	13.39
	2		B300	T500			Activity Pools	Amt	B300	T500	Total	Per Driver
		Sales Price	20.00	40.00			Machining	209304	91000	62900	153900	1.36
		Less: Direct Material	6.62	12.87			Setups	135450	75	240	315	430
		Less: Direct Labor	2.00	3.35			Product Sustaining	100600	1	1	2	50300
		Less: Maufacturing OH	3.41	18.97			Other	60400	NA	NA	NA
		Product Margin	7.97	4.81			Total M OH	505754
							Allocation:	B300	T500
							Machining	123760	85544
							Setups	32250	103200
							Product Sustaining	50300	50300
							Total M OH	206310	239044
							Units	60500	12600
			B300	T500			Manufacturing OH	3.41	18.97
			60500	12600
	3
			B300		T500		Total
		Traditional Cost System	Amount	%	Amount	%	Amount
		Direct Material	4,00,700	44.70%	1,62,200	48.38%	5,62,900
		Direct Labor	1,20,900	13.49%	42,200	12.59%	1,63,100
		Manufacturing OH	3,74,897	41.82%	1,30,857	39.03%	5,05,754
		Total Cost assigned to products	8,96,497	100.00%	3,35,257	100.00%	12,31,754
		Traditional Cost System	Amount	%	Amount	%	Amount
		Direct Costs:
		Direct Material	4,00,700	55%	1,62,200	36.58%	5,62,900
		Direct Labor	1,20,900	17%	42,200	9.52%	1,63,100
		Indirect Costs:
		Machining	1,23,760	17%	85,544	19.29%	2,09,304
		Setups	32,250	4%	1,03,200	23.27%	1,35,450
		Product Sustaining	50,300	7%	50,300	11.34%	1,00,600
		Total Cost assigned to products	7,27,910	100%	4,43,444	100.00%	11,71,354
		Costs not assigned to products:
		Others					60400
		Total Cost					12,31,754