Question

Activity Based Costing Case 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 ........ Cost of goods sold ................ Gross margin Selling and administrative expenses ...... Net operating loss ............. $2,100,000 1,600,000 500,000 550,000 $ (50,000) Hi-Tek produced and sold 70,000 units of B300 at a price of $20 per unit and 17,500 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 $436,300 $200,000 $251,700 $104,000 Direct materials ........... Direct labor .............. Manufacturing overhead .... Cost of goods sold ........ $ 688,000 304,000 606,000 $1,600,000 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 $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: Activity Activity Cost Pool (and Activity Measure) Manufacturing Overhead Total 152,500 375 Machining (machine-hours) .... Setups (setup hours) ................... Product-sustaining (number of products) .... Other (organization-sustaining costs) ...... Total manufacturing overhead cost ........ B300 T500 90,000 62,500 75 300 1 1 ΝΑ ΝΑ $213,500 157,500 120,000 117,000 $606,000 ΝΑ 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. Explain why the traditional and activity-based cost assignments differ.

Answer 1

Answers 1 Product Margin under Traditional Costing Т500 Total B300 Product Margin 500000 363700 136300 2 Product Margin under Activity Based costing Т500 Total B300 Product Margin 496200 -29200 467000

3. Quantitative Comparision of the Traditional and Activity Based Cost Assignments Quantitative comparsion of the Traditional Cost Total Т500 B300 Traditional Costing System Direct Material Direc tLabor Amount Amount 251700 36.6% 436300 63.4% 688000 65.8% 104000 200000 34.2% 304000 Manufacturing Overheads Total Cost Assigned to Products Selling and Administrative Expenses Total Cost 400000 65.8% 208000 34.2% 608000 563700 1036300 1600000 550000 2150000

Quantitative Comparison of Acticity Based Cost Assignments Total T500 B300 Activty Based Costing System Direct Cost Direct Material Direct Labor Advertisements (Traced) Indirect Cost Amount Amount 251700 436300 63.4% 36.6% 688000 65.8% 104000 34.2% 200000 304000 50000 150000 33.3% 100000 66.7% Machining Batch setup Prodcut Sustainind Total Cost Assigned to Products Cost Not asigned to the Products Selling and Administrative Expenses Others 87500 59.0% 213500 126000 41.0% 31500 126000 157500 20.0% 80.0% 50.0% 50.0% 60000 60000 120000 729200 903800 1633000 400000 117000 Total Cost 2033000

Working Notes Total B300 T500 Selling Price Direct Material Direct Labor Production in Units Manufacturing Overheads Advertisements (Traced) Selling and Administrative Expenses Maufacturing OH Estimated Labor Dollars Predetermined Overhead Rate 20 40 688000 436300 251700 200000 104000 304000 70000 17500 87500 608000 50000 100000 550000 608000 304000 2.00 608000/304000 |мон Activity Total 62500 152500 B300 T500 Machining Setups Prodcut sustaining Others 213500 90000 157500 75 300 375 120000 1 2 117000 608000 Traditional Costing System Total взоо Т500 sales Direct Material Direct Labor Manufacturing Overheads Total Manufacturing Cost Product Margin 1400000 700000 2100000 436300 251700 688000 200000 104000 304000 400000 208000 608000 1036300 563700 1600000 363700 136300 500000 LO

Determination of Activity Rate Activty Pool Machining Batch setup Prodcut Sustaining Base Activity Rate 152500 Estimated OH 213500 1.40 157500 375 420.00 60000 120000 2 Activity Based Costing System Total B300 T500 sales Direct Material Direct Labor Advertisements (Traced) Matching (Activity *Rate) Batch Setup (Activity *Rate) Prodcut Sustaining Total Cost Product Margin 700000 1400000 2100000 251700 436300 688000 200000 104000 304000 50000 150000 100000 87500 126000 213500 126000 157500 31500 60000 60000 120000 903800 729200 1633000 496200 -29200 467000