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 $ 1,705,200 Cost of goods sold 1,254,256 Gross margin 450,944 Selling and administrative expenses 590,000 Net operating loss $ (139,056 ) Hi-Tek produced and sold 60,300 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 $ 400,300 $ 162,400 $ 562,700 Direct labor $ 120,600 $ 42,700 163,300 Manufacturing overhead 528,256 Cost of goods sold $ 1,254,256 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $52,000 and $100,000 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) $ 210,036 90,200 62,000 152,200 Setups (setup hours) 155,320 73 280 353 Product-sustaining (number of products) 102,000 1 1 2 Other (organization-sustaining costs) 60,900 NA NA NA Total manufacturing overhead cost $ 528,256 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

Solution 1:

Overhead Allocation - Traditional Costing System
Particulars	B300	T500	Total
Estimated annual Production (In units)	60300	12800
Direct Labor Cost	120600	42700	163300
Overhead Cost Allocation basis direct labour dollar (Overhead / Total direct labor dollar * Labor dollar of model)	$390,126.60	$138,129.40	$528,256.00
Manufacturing overhead cost per unit (Allocated Overhead / Nos of units)	$6.47	$10.79

Computation of Product Margin - Traditional Costing System
Particulars	B300	T500	Total
Sales (B300 - 60,300*$20, T500 - 12800*$39)	$1,206,000	$499,200	$1,705,200
Direct material	$400,300	$162,400	$562,700
Direct labor	$120,600	$42,700	$163,300
Manufacturing overhead	$390,127	$138,129	$528,256
Product Margin	$294,973	$155,971	$450,944

Solution 2:

Determination of activity rate for each activity & allocation of overhead
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	B300		T500
					Usage	Allocated Costs	Usage	Allocated Costs
Machining	$210,036.00	Machine hours	152200	$1.38	90200	$124,476.00	62000	$85,560.00
Setups	$155,320.00	Setup hours	353	$440.00	73	$32,120.00	280	$123,200.00
Product sustaining	$102,000.00	Number of products	2	$51,000.00	1	$51,000.00	1	$51,000.00
Advertising Expense	152000.00					$52,000.00		$100,000.00
Other	$60,600.00	No allocation
Total	$679,956.00					$259,596.00		$359,760.00

Computation of Product Margin - Activity based Costing System
Particulars	B300	T500	Total
Sales (B300 - 60,300*$20, T500 - 12800*$39)	$1,206,000	$499,200	$1,705,200
Direct material	$400,300	$162,400	$562,700
Direct labor	$120,600	$42,700	$163,300
Allocated Manufacturing overhead	$259,596.00	$359,760.00	$619,356
Product Margin	$425,504.00	-$65,660.00	$359,844.00

Solution 3:

Quantity comparison of traditional cost assignment
Particulars	B300		T500		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount	% of total Amount
Direct Material Cost	$400,300	43.9%	$162,400	47.3%	$562,700	44.9%
Direct Labor Cost	$120,600	13.2%	$42,700	12.4%	$163,300	13.0%
Manufacturing Overhead cost	$390,127	42.8%	$138,129	40.2%	$528,256	42.1%
Total	$911,027		$343,229		$1,254,256

Quantity comparison of Activity Based cost assignment
Particulars	B300		T500		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount	% of total Amount
Direct Cost:
Material Cost	$400,300	51.3%	$162,400	28.8%	$562,700	41.8%
Labor Cost	$120,600	15.5%	$42,700	7.6%	$163,300	12.1%
Indirect Cost:
Machining	$124,476	15.9%	$85,560	15.1%	$210,036	15.6%
Setups	$32,120	4.1%	$123,200	21.8%	$155,320	11.5%
Product sustaining	$51,000	6.5%	$51,000	9.0%	$102,000	7.6%
Advertising Expense	$52,000	6.7%	$100,000	17.7%	$152,000	11.3%
Total Cost Assigned to Products	$780,496		$564,860		$1,345,356
Cost not assigned to products					$60,900
Total Cost					$1,406,256