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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 Cost of goods sold Gross margin Selling and administrative expenses Net operating loss 1,649,700 1,248,615 401,085 590,000 (188,915) Hi-Tek produced and sold 60,300 units of B300 at a price of $19 per unit and 12,600 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 $ 400,600 $ 120,400 T500 $ 162,200 $ 43,000 Direct materials Direct labor Manufacturing overhead Cost of goods sold Total $ 562,800 163,400 522,415 $ 1,248, 615 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $53,000 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 Overhead $ 208,925 151,790 101,000 60,700 $ 522,415 Activity Cost Pool (and Activity Measure) Machining machine-hours) Setups (setup hours) Product-sustaining (number of products) Other (organization-sustaining costs) Total manufacturing overhead cost Activity B300 1500 90,200 62,300 73 280 1 NA Total 152,500 353 1 NA NA 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. Complete this question by entering your answers in the tabs below.

Answer 1

Solution: The product margins using the traditional approach B300 $239,420 T500 $161,200 Total $400,620 Product margin Working Notes: Using traditional costing system in which manufacturing overhead is applied to units based on direct labor $ using the predetermined overhead rate plantwide overhead rate = Total manufacturing overhead cost / Total direct labor $ =$522,415/163,400 DLS =$3.19715422 per DLS =$3.20 per DLS B300 $1,145,700 ($19 x 60,300] Sales T500 $504,000 [12,600 x $40] Total $1,649,700 Direct materials $400,600 $162,200 $562,800 Direct labor $120,400 $43,000 $163,400 Manufacturing overhead applied @ $3.20 per DL $ $522,880 $385,280 [120,400 x $3.20] $137,600 [43,000 x3.20) Total manufacturing cost $906,280 $342,800 $1,249,080 e=b+c+d Product margin $239,420 $161,200 $400,620 fra-e

Activity-based costing system Product margin $366,236 -$59,451 $306,785 Working Notes: Under Activity-based costing system determination of the activity rates: Activity Cost Pool machining Setups Product sustaining Total cost 208,925 151,790 101,000 Total activity 152,500 353 C=a/b Activity Rate 1.37 per mHrs 430 per setup 50,500 per product Now the product margins would be computed as follows: B300 $1,145,700 ($19 x 60,300] Sales T500 $504,000 [12,600 x $40] Total $1,649,700 Direct materials $400,600 $162,200 $562,800 Direct labor $120,400 $43,000 $163,400 Advertising expense 53,000 102,000 155,000 Manufacturing OH assigned Machining 208,925 123,574 [90,200 x 1.37) 85,351 [62,300 x 1.37] Setups 151,790 31,390 [73 x 4301 120,400 [280 x 430) Product sustaining 101,000 50,500 [1 x 50,500 ] 50,500 [1 x 50,500) Total cost $779,464 $563,451 $1,342,915 g=b+C+01+d+e+f Product margin $366,236 -$59,451 $306,785 h-a-g

Notes: Other product cost are not allocated as they represents idle capacity cost which is not assigned to product cost T500 B300 % of total amount Total % of total amount Amount Amount Traditional Cost System Direct materials Direct labor Manufacturing overhead Total cost assigned to products Selling and administrative Total cost $400,600 $120,400 $385,280 $906,280 71.2% 73.7% 73.7% $162,200 $43,000 $137,600 $342,800 28.8% 26.3% 26.3% $562,800 $163,400 $522,880 $1,249,080 590,000 $1,839,080 T500 B300 % of total amount Total % of total amount Amount Amount $400,600 $120,400 $53,000 71.2% 73.7% 34.2% $162,200 $43,000 $102,000 28.8% 26.3% 65.8% $562,800 $163,400 $155,000 Activity-Based Costing System Direct costs: Direct materials Direct labor Advertising expense Indirect costs: Machining Setups Product sustaining Total cost assigned to products Costs not assigned to products Selling and administrative Other Total Cost 123,574 31,390 50,500 $779,464 59.1% 20.7% 50.0% 85,351 120,400 50,500 $563,451 40.9% 79.3% 50.0% 208,925 151,790 101,000 $1,342,915 $435,000 60,700 1,838,615

Working Notes: B=(A/E) x 100% B300 % of total amount T500 D=1C/E) x 100% E Total % of total amount Amount Amount 4 Traditional Cost System Direct materials Direct labor Manufacturing overhead Total manufacturing cost Selling and administrative Total cost $400,600 $120,400 $385,280 $906,280 71.2% 73.7% 73.7% $162,200 $43,000 $137,600 $342,800 28.8% 26.3% 26.3% $562,800 $163,400 $522,880 $1,249,080 590,000 $1,839,080 D=A+B+C F=D+E B=(A/E) x 100% B300 % of total amount T500 D=1C/E) x 100% E Total % of total amount Amount Amount $400,600 $120,400 $53,000 71.2% 73.7% 34.2% $162,200 $43,000 $102,000 28.8% 26.3% 65.8% $562,800 $163,400 $155,000 Activity-Based Costing System Direct costs: Direct materials Direct labor Advertising expense Indirect costs: Machining Setups Product sustaining Total cost assigned to products Costs not assigned to products Selling and administrative Other Total Cost 123,574 31,390 50,500 $779,464 59.1% 20.7% 50.0% 85,351 120,400 50,500 $563,451 40.9% 79.3% 50.0% 208,925 151,790 101,000 $1,342,915 (590,000 - advertising expenses 155,000 =435,000] $435,000 60,700 1,838,615 Notes: Total cost of traditional method & ABC have difference of $465 due to rounding off of overhead rate as allowed by question to rounding to two decimal the intermediate calculations. If there is other specific requirement of decimal rounding off in questions other than this, the above solution will be changed, then please comment and wait you will get your solution in required format. Please feel free to ask if anything about above solution in comment section of the question.