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	$	1,778,300
Cost of goods sold		1,235,069
Gross margin		543,231
Selling and administrative expenses		620,000
Net operating loss	$	(76,769	)

Hi-Tek produced and sold 60,300 units of B300 at a price of $21 per unit and 12,800 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	$	400,100	$	162,300	$	562,400
Direct labor	$	120,600	$	42,800		163,400
Manufacturing overhead						509,269
Cost of goods sold					$	1,235,069

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $54,000 and $107,000 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)	$	211,419		90,000	62,100	152,100
Setups (setup hours)		135,450		71	230	301
Product-sustaining (number of products)		101,800		1	1	2
Other (organization-sustaining costs)		60,600		NA	NA	NA
Total manufacturing overhead cost	$	509,269

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 the B300 and T500 under the company’s traditional costing system. (Round your intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)

Required 1:

	B300 T500 Total Product margin $0

Required 2:

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

Required 3:

Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answers to 1 decimal place and and other answers to the nearest whole dollar amounts.)

	B300 T500 Total % of % of Amount Amount Amount Traditional Cost System % % % % % % Total cost assigned to products $0 $0 $0 Total cost $0 B300 T500 Total % of % of Amount Total Amount Amount Total Amount Amount Activity-Based Costing System Direct costs: % % % % % % Indirect costs: % % % % % % Total cost assigned to products $0 $0 0 Costs not assigned to products: Total cost $0

Answer 1

1.

	B300	T500	Total
Selling price	21.00	40.00
Units sold	60300	12800
Sales	1266300	512000	1778300
Direct materials	400100	162300	562400
Direct labour	120600	42800	163400
Manufacturing overheads*	375874	133395	509269
Cost of Goods sold	896574	338495	1235069
Product Margin	369726	173505	543231

*Total manufacturing overhead $			509269
Total direct labour dollars			163400
B300	509269*120600/163400		375874.18
T500	509269*42800/163400		133394.82

2.

	B300	T500	Total
Selling price	21.00	40.00
Units sold	60300	12800
Sales	1266300	512000	1778300
Direct materials	400100	162300	562400
Direct labour	120600	42800	163400
Manufacturing overheads*	207950	240719	448669
Advertising expenses	54000	107000	161000
Cost of Goods sold	782650	552819	1335469
Product Margin	483650	-40819	442831

*Manufacturing overheads
	Overhead cost $	B300		T500		Total
Machining	211419	90000	125100	62100	86319	152100
Setups	135450	71	31950	230	103500	301
Product sustaining	101800	1	50900	1	50900	2
Other	60600	NA	0	NA	0	NA
Total manufacturing overhead cost	509269		207950		240719
Advertising expenses	161000		54000		107000
Total Overheads cost	670269		261950		347719

3.

	B300			T500			Total
		% of			% of
	Amount	Total Amount		Amount	Total Amount		Amount
Traditional Cost System
Direct material	400100	71.1	%	162300	28.9	%	562400
Direct labour	120600	73.8	%	42800	26.2	%	163400
Manufacturing overhead	375874	73.8	%	133395	26.2	%	509269
Total cost assigned to products	896574	72.6	%	338495	27.4	%	1235069
Selling and Administrative							620000
Total Cost							1855069
	B300			T500			Total
		% of			% of
	Amount	Total Amount		Amount	Total Amount		Amount
Activity Based Costing System
Direct Costs:
Direct material	400100	71.1	%	162300	28.9	%	562400
Direct labour	120600	73.8	%	42800	26.2	%	163400
Advertising expense	54000	33.5	%	107000	66.5	%	161000
Indirect Costs:
Machining	125100	59.2	%	86319	40.8	%	211419
Setups	31950	23.6	%	103500	76.4	%	135450
Product sustaining	50900	50.0	%	50900	50.0	%	101800
Total cost assigned to products	782650	58.6	%	552819	41.4	%	1335469
Costs not assigned to products
Selling and Administrative							459000
Manufacturing overheads							60600
Total Costs							1855069