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	$	1,772,400
Cost of goods sold		1,242,484
Gross margin		529,916
Selling and administrative expenses		610,000
Net operating loss	$	(80,084	)

Hi-Tek produced and sold 60,400 units of B300 at a price of $21 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		T500		Total
Direct materials	$	400,700	$	162,700	$	563,400
Direct labor	$	120,800	$	42,900		163,700
Manufacturing overhead						515,384
Cost of goods sold					$	1,242,484

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $57,000 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)	$	208,624		90,900	62,500	153,400
Setups (setup hours)		144,760		79	250	329
Product-sustaining (number of products)		101,400		1	1	2
Other (organization-sustaining costs)		60,600		NA	NA	NA
Total manufacturing overhead cost	$	515,384

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

1st Stage Pool Cost Pool Driver MHET Setup Hrs. # of Products B300 90,900 Activity Driver Usage T500 62,500 250 Total 153,400 Activity Cost Pool Machining Setups Product Sustaining Organizational Sustaining Total Mfg, Overhead 79 Cost Pool Rates $1.360 $440 $50.700 329 Allocations $208,624 144,760 101,400 60,600 $515,384 NA NA NA NA Required: Compute the product margins for the B300 and T500 under the company's traditional costing system. PMOH Rate = Estimated total mfg. OH cost / Estimated total DL $ $515,384 $163,700 PMOH Rate = $3.15 per DLS T500 Sales Direct materials Direct labor Manufacturing overhead applied Total manufacturing costs Product margin (Traditional Gross Margin) B300 $1,268.400 $400,700 120,800 380.320 $901.820 $366.580 $504,000 $162,700 42,900 135,064 $340,664 $163,336 Total $1,772,400 $563,400 163,700 515,384 $1,242,484 $529,916 Note: All of the mfg. overhead costs is applied to either B300 or T500. Compute the product margins for the B300 and T500 under the activity-based costing system. B300 $1,268,400 $400,700 120,800 57,000 T500 $504,000 $162,700 42,900 100,000 Total $1,772,400 S563,400 163,700 157.000 Sales Direct materials Direct labor Advertising expense MOH assigned (2nd Stage Allocations) Machining pool Setup pool Product sustaining Total costs assigned Product margin (ABC) 123,624 34,760 50,700 $787,584 $480,816 85,000 110,000 50,700 $551,300 ($ 47,300) 208,624 144,760 101,400 $1,338,884 $433,516 Prepare a quantitative comparison of the traditional and activity-based cost assignments. 71.12% Traditional Costing Direct materials Direct labor Manufacturing overhead applied Product cost Selling & administrative Note: Total costs accounted for B300 $400,700 $120.800 $380,320 5901,820 73.79% T500 $162,700 $42,900 $135,064 $340,664 28.88% 26.21% 26.21% 73.79% Total $563,400 $163,700 $515,384 $1,242,484 610.000 $1,852,484 Total B300 $400,700 $120.800 $57,000 71.12% 73.79% 36.31% T500 $162,700 $42,900 $100,000 28.88% 26.21% 63.69% $563,400 $163,700 $157,000 ABC Costing Direct materials Direct labor Advertising expense (traced) Indirect cost Machining pool Setup pool Product sustaining Product cost cost not assigned Selling & Administrative (Indirect) other Note: Total costs accounted for 123,624 34,760 50,700 $787,584 59.26% 24.01% 50.00% 85,000 110,000 50,700 $551,300 40.74% 75.99% 50.00% 208,624 144,760 101,400 $1,338,884 453,000 60,600 $1,852,484