Question

Hi-Tek produced and sold 60,100 units of B300 at a price of $20 per unit and 12,700 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	$	162,900	$	563,800
Direct labor	$	120,800	$	42,200		163,000
Manufacturing overhead						487,930
Cost of goods sold					$	1,214,730

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $55,000 and $104,000 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)	$	198,770		90,500	62,400	152,900
Setups (setup hours)		127,160		79	210	289
Product-sustaining (number of products)		101,000		1	1	2
Other (organization-sustaining costs)		61,000		NA	NA	NA
Total manufacturing overhead cost	$	487,930

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

$487,930 1) Total estimated overhead costs $163,000 Total direct labor dollars of direct labor cost ($487930/ $163000) Predetermined overhead rate 299.34% T500 B300 $1,202,000 $495,300 [60100 units x $20; 12700 units x $39] Sales Less: -$400,900 -$162,900 [Given] Direct materials -$120,800 -$42,200 [Given] Driect labor -$361,607 -$126,323 [$120800 x 299.34%; $42200 x 299.34% $318,693 Manufacturing overheads $163,877 Product Margin using traditional costing Estimated Activity Overhead Volume 2) Activity Overheads Rate (1)/(2) $1.30 [$198770/152900 machine-hours] (1) (2) $198,770 Machining 152,900 $440.00 [$127160 289 setup hours] $50,500.00 [$101000 / 2 products] $127,160 Setting up 289 Product-Sust $101,000 2

B300 T500 $117,650 $81,120 [90500 hours x $1.30; 62400 hours x $1.30] Machining $92,400 79 setups x $440.00; 210 setups x $440.00] $50,500 [1 product x $50500.00; 1 product x $50500.00] $224,020 $34,760 Setting up $50,500 Product-Sust. $202,910 Total Mfg.OHs assigned Therefore, B300 T500 $1,202,000 $495,300 [60100 units x $20; 12700 units x $39] Sales Less: -$400,900 -$162,900 Direct materials -$120,800 -$42,200 Driect labor Manufacturing overheads Traceable advertising expense -$202,910 -$224,020 [As calculated above] -$55,000 $104,000 [Given] $422,390 -$37,820 Product Margin using Activity costing T500 3) B300 Total Amount Amount Amount Traditional Costing System: $400,900 $162,900 $563,800 Direct materials 71.1% 28.9% $120,800 74.1% $42,200 $163,000 Driect labor 25.9% $361,607 $883,307 74.1% $126,323 $487,930[Ref: Requirement-1] $1,214,730 Manufacturing overheads Total Costs assigned 25.9% $331,423 72.7% 27.3%

$159,000 [$55000+ $104000] Costs not assigned to products (Selling & admin. expense) $1,373,730 Total Costs Activity Based Costing System: Direct Costs: Total B300 T500 Amount Amount Amount $400,900 $162,900 $563,800 $163,000 Direct materials 71.1% 28.9% $120,800 74.1% $42,200 Driect labor 25.9% Indirect Costs: $117,650 $81,120 $198,770 [Ref: Requirement-2] $127,160 [Ref: Requirement-2] $101,000 [Ref: Requirement-2] $159,000 Machining 59.2% 40.8% $34,760 $92,400 72.7% Setting up Product-Sust Traceable Advertising expen 27.3% $50,500 $50,500 $104,000 50.0% 50.0% $55,000 34.6% 65.4% Total Costs assigned $779,610 $533,120 40.6% $1,312,730 59.4% Costs not assigned to products: Other (Organization sustaining costs) $61,000 $1,373,730 [$1312730 + $61000] Total Costs