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	$	1,705,200
Cost of goods sold		1,242,098
Gross margin		463,102
Selling and administrative expenses		610,000
Net operating loss	$	(146,898	)

Hi-Tek produced and sold 60,300 units of B300 at a price of $20 per unit and 12,800 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	$	400,900	$	162,100	$	563,000
Direct labor	$	120,500	$	42,600		163,100
Manufacturing overhead						515,998
Cost of goods sold					$	1,242,098

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 $106,000 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)	$	204,618		90,400	62,300	152,700
Setups (setup hours)		150,880		78	290	368
Product-sustaining (number of products)		100,000		1	1	2
Other (organization-sustaining costs)		60,500		NA	NA	NA
Total manufacturing overhead cost	$	515,998

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

Part A

Predetermined overhead rate = Estimated total manufacturing overhead cost
Estimated total direct labor dollars = 515998/163100 = $3.16 per direct labor dollar

	B300	T500	Total
Sales revenue	1206000	499200	1705200
Direct materials	400900	162100	563000
Direct labor	120500	42600	163100
Manufacturing overhead applied (@ $3.16 per direct labor-dollar)	380780	134616	515396
Total manufacturing cost	902180	339316	1241496
Product margin	303820	159884	463704

60300*20 =1206000

12800*39 =499200

Part B

Activity Cost Pools	total cost	total activity	activity rate
machining	204618	152700	1.34
set ups	150880	368	410
product sustaining	100000	2	50000

	B300	T500	Total
Sales revenue	1206000	499200	1705200
Direct materials	400900	162100	563000
Direct labor	120500	42600	163100
machining	121136	83482	204618
set ups	31980	118900	150880
product sustaining	50000	50000	100000
Advertising expense	59000	106000	165000
Total manufacturing cost	783516	563082	1346598
Product margin	422484	(63882)	358602

Part C

The quantitative comparison is as follows:

Traditional Cost System

	B300	%	T500	%	Total
Direct materials	400900	71.21%	162100	28.79%	563000
Direct labor	120500	73.88%	42600	26.12%	163100
Manufacturing overhead applied (@ $3.24 per direct labor-dollar)	380780	73.88%	134616	26.12%	515396
Total cost assigned to products	902180		339316		1241496
Selling and administrative expense					610000
Total cost					$1851496

Activity-Based Costing System

	B300	%	T500	%	Total
Direct costs:
Direct materials	400900	71.21%	162100	28.79%	563000
Direct labor	120500	73.88%	42600	26.12%	163100
Advertising expense	59000	35.76%	106000	64.24%	165000
Indirect costs
machining	121136	59.20%	83482	40.80%	204618
set ups	31980	21.20%	118900	78.80%	150880
product sustaining	50000	50.00%	50000	50.00%	100000
Total cost assigned to products	783516		563082		1346598
Costs not assigned to products:
Selling and administrative					445000
other					60500
Total cost					$1852098

610000-165000 = 445000