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 $ 1,712,000 Cost of goods sold 1,236,330 Gross margin 475,670 Selling and administrative expenses 580,000 Net operating loss $ (104,330 ) Hi-Tek produced and sold 60,200 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 $ 400,300 $ 162,900 $ 563,200 Direct labor $ 120,900 $ 42,500 163,400 Manufacturing overhead 509,730 Cost of goods sold $ 1,236,330 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $56,000 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) $ 214,760 90,500 62,900 153,400 Setups (setup hours) 134,070 77 250 327 Product-sustaining (number of products) 100,600 1 1 2 Other (organization-sustaining costs) 60,300 NA NA NA Total manufacturing overhead cost $ 509,730 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	Manufacturing overhead rate =	509730/163400	3.120
		B300	T500	Total
	Sales	1204000	508000	1712000
	Cost of goods sold
	Direct material	400300	162900	563200
	Direct labor	120900	42500	163400
	Manufacturing overheads	377150	132580	509730
		(120900*3.120)	(42500*3.120)
	Total cost of goods sold	898350	337980	1236330
	Product margin	305650	170020	475670
	Selling and administrative			580000
	Net operating Loss			-104330
	ABC	Total cost	Total cost driver	Cost per driver	B300	T500	Total
	Machining cost	214760	153400	1.4	126700	88060	214760
	Setup cost	134070	327	410	31570	102500	134070
	Product sustaining	100600	2	50300	50300	50300	100600
	Other cost	60300
		509730
2	ABC	B300	T500	Total
	Sales	1204000	508000	1712000
	Cost
	Direct material	400300	162900	563200
	Direct labor	120900	42500	163400
	Machining cost	126700	88060	214760
	Indirect cost
	Setup cost	31570	102500	134070
	Product sustaining	50300	50300	100600
	Advertising	56000	100000	156000
	Total cost	785770	546260	1332030
	Product margin	418230	-38260	379970
	Other cost			60300
	Other selling and admin			424000
	Net operating loss			-104330