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	$	1,699,400
Cost of goods sold		1,224,856
Gross margin		474,544
Selling and administrative expenses		630,000
Net operating loss	$	(155,456	)

Hi-Tek produced and sold 60,400 units of B300 at a price of $20 per unit and 12,600 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	$	400,700	$	162,800	$	563,500
Direct labor	$	120,500	$	43,000		163,500
Manufacturing overhead						497,856
Cost of goods sold					$	1,224,856

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 $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)	$	209,336		90,700	62,100	152,800
Setups (setup hours)		126,420		71	230	301
Product-sustaining (number of products)		101,200		1	1	2
Other (organization-sustaining costs)		60,900		NA	NA	NA
Total manufacturing overhead cost	$	497,856

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 = 497856/163500 = $3.04 per direct labor dollar

	B300	T500	Total
Sales revenue	1208000	491400	1699400
Direct materials	400700	162800	563500
Direct labor	120500	43000	163500
Manufacturing overhead applied (@ $3.04 per direct labor-dollar)	366320	130720	497040
Total manufacturing cost	887520	336520	1224040
Product margin	320480	154880	475360

60400*20 =1208000

12600*39 =491400

Part B

Activity Cost Pools	total cost	total activity	activity rate
machining	209336	152800	1.37
set ups	126420	301	420
product sustaining	101200	2	50600

	B300	T500	Total
Sales revenue	1208000	491400	1699400
Direct materials	400700	162800	563500
Direct labor	120500	43000	163500
machining	124259	85077	209336
set ups	29820	96600	126420
product sustaining	50600	50600	101200
Advertising expense	53000	109000	162000
Total manufacturing cost	778879	547077	1325956
Product margin	429121	(55677)	373444

Part C

The quantitative comparison is as follows:

Traditional Cost System

	B300	%	T500	%	Total
Direct materials	400700	71.11%	162800	28.89%	563500
Direct labor	120500	73.70%	43000	26.30%	163500
Manufacturing overhead applied (@ $3.24 per direct labor-dollar)	366320	73.70%	130720	26.30%	497040
Total cost assigned to products	887520		336520		1224040
Selling and administrative expense					630000
Total cost					$1854040

Activity-Based Costing System

	B300	%	T500	%	Total
Direct costs:
Direct materials	400700	71.11%	162800	28.89%	563500
Direct labor	120500	73.70%	43000	26.30%	163500
Advertising expense	53000	32.72%	109000	67.28%	162000
Indirect costs
machining	124259	59.36%	85077	40.64%	209336
set ups	29820	23.59%	96600	76.41%	126420
product sustaining	50600	50.00%	50600	50.00%	101200
Total cost assigned to products	778879		547077		1325956
Costs not assigned to products:
Selling and administrative					468000
other					60900
Total cost					$1854856

630000-162000 = 468000