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	$	1,710,000
Cost of goods sold		1,230,814
Gross margin		479,186
Selling and administrative expenses		580,000
Net operating loss	$	(100,814	)

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 $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	$	400,500	$	162,700	$	563,200
Direct labor	$	120,400	$	42,400		162,800
Manufacturing overhead						504,814
Cost of goods sold					$	1,230,814

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 $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 Overhead			Activity
Activity Cost Pool (and Activity Measure)				B300	T500	Total
Machining (machine-hours)	$	205,154		90,300	62,800	153,100
Setups (setup hours)		137,760		78	250	328
Product-sustaining (number of products)		101,000		1	1	2
Other (organization-sustaining costs)		60,900		NA	NA	NA
Total manufacturing overhead cost	$	504,814

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 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

product margin??

Answer 1

Solution

Hi-Tek Manufacturing Inc

1. Computation of the product margins for the B300 and T500 under the company’s traditional costing system:

B 300 T 500 Total Sales $1,202,000 $508,000 $1,710,000 Direct materials $400,500 $162,700 $563,200 Direct labor $120,400 $42,400 $162,800 Manufacturing overhead $373,339 $131,475 $504,814 Selling and administrative costs $58,000 $109,000 $167,000 Total product costs $952,240 $445,574 $1,397,814 Product margin $249,760 $62,426 $312,186
Working: Determination of predetermined manufacturing overhead rate using direct labor cost as allocation basis: Total manufacturing overhead $504,814 Direct labor cost $162,800 Predetermined overhead rate = $504,814/$162,800 = $3.101 per direct labor cost Computation of product margins for B300 and T500 under the activity based costing system: B300 T500 Total Sales $1,202,000 $508,000 $1,710,000 Direct materials $400,500 $162,700 $563,200 Direct labor $120,400 $42,400 $162,800 manufacturing overhead - machining $121,002 $84,152 $205,154 Setups $32,760 $105,000 $137,760 product sustaining 50,500 $50,500 $101,000 Total costs $725,162 $444,752 $1,169,914 Product margin $476,838 $63,248 $540,086 Activity based costing, product margins – B300 T500 Total product margin $476,838 $63,248 $540,086 Activity Rates Activity cost pools Total cost Usage Activity Rate Machining $205,154 153,100 MHs $1.34 per hour Setups $137,760 328 setup hours $420 per setup Product Sustaining $101,000 2 products $50,500 per product Overhead Assigned to: B300 Usage Activity rate Total cost Machining 90,300 MHs $1.34 per hour $121,002 Setups 78 $420 per setup hr $32,760 Product Sustaining 1 50,500 per product $50,500 Total overhead $204,262 T500 Usage Activity rate Total cost Machining 62,800 MHs $1.34 per hour $84,152 Setups 250 $420 per setup hr $105,000 Product Sustaining 1 50500 per product $50,500 Total overhead $239,652 Note: the other activity pool (organization-sustaining costs) does not form part of the product margin statement under activity based costing as the same is not assigned for the products – B300 and T500. Quantitative comparison of the traditional and activity based cost assignments: Traditional Costing System: B300 % to total cost T500 Total Direct materials $400,500 71.11% $162,700 28.89% $563,200 Direct labor $120,400 73.96% $42,400 26.04% $162,800 Manufacturing overhead $373,339 73.96% $131,475 26.04% $504,814 selling and administration costs $58,000 34.73% $109,000 65.27% $167,000 Total costs assigned to products $952,239 68.12% $445,575 31.88% $1,397,814 other selling and administration costs $413,000 Total $1,810,814 Activity based costing: Direct materials $400,500 71.11% $162,700 28.89% $563,200 Direct labor $120,400 73.96% $42,400 26.04% $162,800 Manufacturing overhead - machining $121,002 58.98% $84,152 41.10% $205,154 Setups $32,760 23.78% $105,000 76.21% $137,760 product -sustaining $50,500 50% $50,500 50% $101,000 other manufacturing overhead $60,900 selling and administration costs $413,000 $1,643,814 The comparison between traditional costing system and activity based costing system reveals a significant difference in the way the manufacturing overhead is assigned to products. Under the activity based costing approach, the overhead costs are assigned based on usage and hence shows accurate allocation, unlike the predetermined rate based on direct labor costs used under traditional costing method.