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 below:

Hi-Tek Manufacturing Inc. Income Statement
Sales	$	1,693,400
Cost of goods sold		1,240,144
Gross margin		453,256
Selling and administrative expenses		570,000
Net operating loss	$	(116,744)

Hi-Tek produced and sold 60,010 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	$	400,300		162,900	$	563,200
Direct labor	$	120,600	$	42,100		162,700
Manufacturing overhead						514,244
Cost of goods sold					$	1,240,144

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek�s ABC implementation team concluded that $54,000 and $102,000 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		Activity
Activity Cost Pool (and Activity Measure)	Overhead		B300	T500	Total
Machining (machine-hours)	$	212,244	90,800	63,000	153,800
Setups (setup hours)		139,500	80	230	310
Product-sustaining (number of products)		101,600	1	1	2
Other (organization-sustaining costs)		60,900	NA	NA	NA
Total manufacturing overhead cost	$	514,244

1. Compute the product margins for the B300 and T500 under the company�s traditional costing system.

	B300	T500	Total
Product margin

2. Compute the product margins for B300 and T500 under the activity-based costing system. (Negative product margins should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places.)

	B300	T500	Total
Product margin

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answer to 1 decimal place. (i.e. .1234 should be entered as 12.3))

Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answers to 1 decimal place and and other answers to the nearest whole dollar amounts.)

Answer 1

Answer to Part 1.: Computation of Product Margins Using Traditional Approach: B300 T500 Total 1,202,000 491,400 1,693,400 Sales Costs: Direct Materials Direct Labor Manufacturing Overhead Applied Total Manufacturing Cost 400,300 120,600 381,179 902,079 162,900 42,100 133,065 338,065 563,200 162,700 514,244 1,240,144 Product Margin 299,921 153,335 453,256 Calculation: Predetermined Overhead Rate = Estimated Total Manufacturing Overhead Cost / Estimated Total DLH Predetermined Overhead Rate = $514,244 / $162,700 * 100 Predetermined Overhead Rate = 316.0688%

Activity Cost Pool Answer to Part 2. Estimated Estimated Overhead Activity 212,244 153,800 MH Machining (Machine Hours) Activity Rate 1.38 per MH per Setup 450 Hours 50,800 per Product Setups (Setup Hours) Product Sustaining 139,500 310 Setups 101,600 2 Calculation of Product Margins using Activity Based Costing System: B300 T500 Total 1,202,000 491,400 1,693,400 Sales Costs: Direct Materials Direct Labor Advertising Machining Setups Product Sustaining Total Costs 400,300 120,600 54,000 125,304 36,000 50,800 787,004 162,900 42,100 102,000 86,940 103,500 50,800 548,240 563,200 162,700 156,000 212,244 139,500 101,600 1,335,244 Product Margin 414,996 -56,840 358,156

Total Answer to Part 3. B300 % of Total Amount Amount T500 % of Total Amount Amount Amount Traditional Cost System: Direct Materials Direct Labor Manufacturing Overhead Total Costs assigned to Products 400,300 120,600 381,179 902,079 71.08% 74.12% 74.12% 162,900 42,100 133,065 338,065 28.92% 25.88% 25.88% 563,200 162,700 514,244 1,240,144

Total B300 % of Total Amount Amount T500 % of Total Amount Amount Amount 400,300 120,600 54,000 71.08% 74.12% 34.62% 162,900 42,100 102,000 28.92% 25.88% 65.38% 563,200 162,700 156,000 Activity Based Costing System: Direct Costs: Direct Materials Direct Labor Advertising Expense Indirect Costs: Supporting Direct Labor Batch Setups Product Sustaining Total Cost assigned to Products Cost not assigned to Products: Other Total Cost 125,304 36,000 50,800 787,004 59.04% 25.81% 50.00% 86,940 103,500 50,800 548,240 40.96% 74.19% 50.00% 212,244 139,500 101,600 1,335,244 60,900 1,396,144