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	$	1,691,500
Cost of goods sold		1,214,870
Gross margin		476,630
Selling and administrative expenses		580,000
Net operating loss	$	(103,370	)

Hi-Tek produced and sold 60,200 units of B300 at a price of $20 per unit and 12,500 units of T500 at a price of $39 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	$	120,400	$	42,900		163,300
Manufacturing overhead						488,370
Cost of goods sold					$	1,214,870

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $59,000 and $109,000 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)	$	205,690		90,700	62,800	153,500
Setups (setup hours)		121,380		79	210	289
Product-sustaining (number of products)		100,600		1	1	2
Other (organization-sustaining costs)		60,700		NA	NA	NA
Total manufacturing overhead cost	$	488,370

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

1)	predetermined overhead rate
	total estimated manufacturing overhead/total estimated direct labor dollars
	488370/163300
	2.990631
	product margin using traditional appraoch
					B300	T500	total
	sales				1204000	487500	1691500
	less:Expenses
	direct materials				400300	162900	563200
	direct labor				120400	42900	163300
	manufacturing OH applied @2.99				360072	128298	488370
	total manufacturing cost				880772	334098	1214870
	product margin				323228	153402	476630	answer
2)	ABC activity based
	Activity rates
					(a)	(b)	c=a/b
	Activity cost pools				total cost	total	Activity rate
						activity
	machining				205,690	153,500	1.34	per machine hour
	Setups				121,380	289	420	per setup hour
	product sustaining				100,600	2	50300	per product
	product margin under ABC accounting
					B300	T500	total
	sales				1204000	487500	1691500
	less:Expenses
	direct materials				400300	162900	563200
	direct labor				120400	42900	163300
	Advertising expense				59,000	109,000	168000
	manufacturing overhead assigned
	machining				121538	84152	205690
	Setups				33180	88200	121380
	product sustaining				50300	50300	100600
	total cost				784,718	537,452	1322170
	product margin				419282	-49952	369330
	Traditional cost system			B        300		T -500
3)					% of total		% of total	Total
				amount	amount	amount	amount	amount
	Traditional cost system
	Direct materials			400300	71.1%	162900	28.9%	563200
	direct labor			120400	73.7%	42900	26.3%	163300
	manufacturing overhead			360072	73.7%	128298	26.3%	488370
	total cost assigned to products							1214870
	selling & administrative cost							580,000
	total cost.							1794870
				B        300		T -500
					% of total		% of total	Total
				amount	amount	amount	amount	amount
	ABC based costing system
	Direct costs
	direct materials			400300	71.1%	162900	28.9%	563200
	direct labor			120400	73.7%	42900	26.3%	163300
	Advertising expense			59,000	35.1%	109,000	64.9%	168000
	Indirect costs:
	machining			121538	59.1%	84152	40.9%	205690
	Setups			33180	27.3%	88200	72.7%	121380
	product sustaining			50300	50.0%	50300	50.0%	100600
	total cost assigned to products			784718		537452		1322170
	cost not assigned to products
	Selling & administrative expense							412,000
	other							60,700
	total cost.							1794870