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 below: Hi-Tek Manufacturing Inc. Income Statement Sales $ 1,770,500 Cost of goods sold 1,225,588 Gross margin 544,912 Selling and administrative expenses 610,000 Net operating loss $ (65,088) Hi-Tek produced and sold 60,500 units of B300 at a price of $21 per unit and 12,500 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 $ 120,700 $ 42,500 163,200 Manufacturing overhead 499,188 Cost of goods sold $ 1,225,588 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $50,000 and $102,000 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 Activity Activity Cost Pool (and Activity Measure) Overhead B300 T500 Total Machining (machine-hours) $ 204,288 90,600 63,000 153,600 Setups (setup hours) 134,200 75 230 305 Product-sustaining (number of products) 100,400 1 1 2 Other (organization-sustaining costs) 60,300 NA NA NA Total manufacturing overhead cost $ 499,188 Required 1. Compute the product margins for the B300 and T500 under the company’s traditional costing system. (Do not round your overhead rate. Round your other intermediate and final answers to the nearest whole number.) 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.) 3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Do not round your overhead rate. Round your other intermediate calculations and final answers to the nearest whole number. Round your "Percentage" answer to 1 decimal place. (i.e. .1234 should be entered as 12.3))

Answer 1

Solution 1:

Predetermined overhead rate = Estimated manufacturing overhead / Estimated direct labor dollars

= $499,188 / $163,200 = $3.05875 per direct labor dollar

Computation of Product Margin - Traditional Costing System
Particulars	B300	T500	Total
Sales (B300 - 60,500*$21, T500 - 12500*$40)	$1,270,500	$500,000	$1,770,500
Direct material	$400,300	$162,900	$563,200
Direct labor	$120,700	$42,500	$163,200
Manufacturing overhead ($3.05875 * Direct labor)	$369,191	$129,997	$499,188
Product Margin	$380,309	$164,603	$544,912

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	$204,288.00	Machine hours	153600	$1.33	90600	$120,498.00	63000	$83,790.00
Setups	$134,200.00	Setup hours	305	$440.00	75	$33,000.00	230	$101,200.00
Product sustaining	$100,400.00	Number of products	2	$50,200.00	1	$50,200.00	1	$50,200.00
Other	$60,300.00	No allocation
Total	$499,188.00					$203,698.00		$235,190.00

Computation of Product Margin - Activity based Costing System
Particulars	B300	T500	Total
Sales (B300 - 60,500*$21, T500 - 12500*$40)	$1,270,500	$500,000	$1,770,500
Direct material	$400,300	$162,900	$563,200
Direct labor	$120,700	$42,500	$163,200
Allocated Manufacturing overhead	$203,698.00	$235,190.00	$438,888
Advertising Expense	$50,000.00	$102,000.00	$152,000.00
Product Margin	$495,802.00	-$42,590.00	$453,212.00

Solution 3:

Quantity comparison of traditional cost assignment
Particulars	B300		T500		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Material Cost	$400,300	71.1%	$162,900	28.9%	$563,200
Direct Labor Cost	$120,700	74.0%	$42,500	26.0%	$163,200
Manufacturing Overhead cost	$369,191	74.0%	$129,997	26.0%	$499,188
Total cost assigned to products	$890,191		$335,397		$1,225,588
Total cost not assigned to product:
Selling and adminstrative Expenses					$610,000.00
Total Cost					$1,835,588

Quantity comparison of Activity Based cost assignment
Particulars	B300		T500		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Cost:
Material Cost	$400,300	71.1%	$162,900	28.9%	$563,200
Labor Cost	$120,700	74.0%	$42,500	26.0%	$163,200
Advertising Expense	$50,000	32.9%	$102,000	67.1%	$152,000
Indirect Cost:
Machining	$120,498	59.0%	$83,790	41.0%	$204,288
Setups	$33,000	24.6%	$101,200	75.4%	$134,200
Product sustaining	$50,200	50.0%	$50,200	50.0%	$100,400
Total Cost Assigned to Products	$774,698		$542,590		$1,317,288
Cost not assigned to products:
Manufacturing					$60,300
Selling and administrative					$458,000
Total Cost					$1,835,588