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	$	1,655,600
Cost of goods sold		1,233,735
Gross margin		421,865
Selling and administrative expenses		600,000
Net operating loss	$	(178,135	)

Hi-Tek produced and sold 60,400 units of B300 at a price of $19 per unit and 12,700 units of T500 at a price of $40 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	$	162,700	$	563,400
Direct labor	$	120,800	$	42,700		163,500
Manufacturing overhead						506,835
Cost of goods sold					$	1,233,735

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $52,000 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)	$	206,415		90,800	62,100	152,900
Setups (setup hours)		139,020		71	260	331
Product-sustaining (number of products)		101,200		1	1	2
Other (organization-sustaining costs)		60,200		NA	NA	NA
Total manufacturing overhead cost	$	506,835

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

solution: 1) product margin under traditional system sales B300 1,147,600 T500 508,000 Total 1,655,600 Direct materials Direct labor Manufacturing overhead applied (direct labor cost*3.24359)** total manufacturing cost 400,700 120,800 374,469 162,700 42,700 132,366 563,400 163,500 506,835 895,969 337,766 1,233,735 Product margin 251,631 | 170,234 421,865 3.09991 **overhead rate 3 506835/163500 5 2) product margin under ABC 5 sales B300 T 500 1,147,600 508,000 Total 1,655,600 *working Machining * Setups Product-sustaining B300 122,580 29,820 50600*1 T500 83,835 109,200 50600*1 5 Direct materials - Direct labor advertising exp 1 Machining 2 Setups * 3 Product-sustaining * 4 total manufacturing cost 400,700 162,700 120,800 42,700 52,000 109,000 122,580 83,835 29,820 109,200 50,600 50,600 776,500 558,035 563,400 163,500 161,000 206,415 139,020 101,200 1,334,535 Calculation of activity rate Manufacturing Activity activity rate Activity Cost Pool (and Activity Measure) Overhead Total Machining (machine-hours) 206415 152900 1.35 Setups (setup hours) 139020 331 Product-sustaining (number of products) 101200 2 50,600 420 5 Product margin 371,100 - 50,035 321,065 Sheet512 Sheet513 Sheet514 Sheet515 Sheet516 Sheet517 Sheet518 Sheet519 Sheet520 T L - ill ENG US 15:39 18/02/2020

3) comparision B300 T500 amount amount Traditional cost system Direct materials Direct labor Manufacturing overhead applied total cost assigned to product selling and administrative exp total cost 400,700 120,800 374,469 895,969 % of total amount 71.1% 73.9% 73.9% 162,700 42,700 132,366 337,766 % of total amount 28.9% 26.1% 26.1% B300 T500 amount % of total amount amount % of total amount 400,700 120,800 52,000 71.1% 73.9% 32.3% 162,700 42,700 109,000 28.9% 26.1% 67.7% Activity based costing direct cost Direct materials Direct labor advertising expense Indirect cost Machining * Setups * Product-sustaining * total cost assigned to product cost not assigned to product selling and administrative exp (600000-161000) Other (organization-sustaining costs) total cost 122,580 29,820 50,600 776,500 59.4% 21.5% 50.0% 83,835 109,200 50,600 558,035 40.6% 78.5% 50.0%