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	$	1,693,400
Cost of goods sold		1,255,186
Gross margin		438,214
Selling and administrative expenses		570,000
Net operating loss	$	(131,786	)

Hi-Tek produced and sold 60,100 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	$	400,100	$	162,700	$	562,800
Direct labor	$	120,400	$	42,500		162,900
Manufacturing overhead						529,486
Cost of goods sold					$	1,255,186

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $58,000 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)	$	204,886		90,100	62,800	152,900
Setups (setup hours)		162,900		72	290	362
Product-sustaining (number of products)		101,200		1	1	2
Other (organization-sustaining costs)		60,500		NA	NA	NA
Total manufacturing overhead cost	$	529,486

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.

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.)

Req 3 looks like this

	B300 T500 Total % of % of Amount Amount Amount Traditional Cost System % % % % % % Total cost assigned to products $0 $0 $0 Total cost $0 B300 T500 Total % of % of Amount Total Amount Amount Total Amount Amount Activity-Based Costing System Direct costs: % % % % % % Indirect costs: % % % % % % Total cost assigned to products $0 $0 0 Costs not assigned to products: Total cost $0

• Required 2

Answer 1

Solution 1:

Predetermined overhead rate = Estimated overhead / Estimated direct labor dollars = $529,486 / 162900 = $3.25 per direct labor dollar

Computation of Product Margin - Traditional Costing System
Particulars	B300	T500	Total
Sales (B300 - 60,100*$20, T500 - 12600*$39)	$1,202,000	$491,400	$1,693,400
Direct material	$400,100	$162,700	$562,800
Direct labor	$120,400	$42,500	$162,900
Manufacturing overhead (Direct labor * $3.25)	$391,300	$138,125	$529,425
Product Margin	$290,200	$148,075	$438,275

Solution 2:

Determination of activity rate for each activity & allocation of overhead
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	B300		T500
					Usage	Allocated Costs	Usage	Allocated Costs
Machining	$204,886.00	Machine hours	152900	$1.34	90100	$120,734.00	62800	$84,152.00
Setups	$162,900.00	Setup hours	362	$450.00	72	$32,400.00	290	$130,500.00
Product sustaining	$101,200.00	Number of products	2	$50,600.00	1	$50,600.00	1	$50,600.00
Other	$60,500.00	No allocation
Total	$529,486.00					$203,734.00		$265,252.00

Computation of Product Margin - Activity based Costing System
Particulars	B300	T500	Total
Sales (B300 - 60,100*$20, T500 - 12600*$39)	$1,202,000	$491,400	$1,693,400
Direct material	$400,100	$162,700	$562,800
Direct labor	$120,400	$42,500	$162,900
Allocated Manufacturing overhead	$203,734.00	$265,252.00	$468,986
Advertising Expense	$58,000.00	$104,000.00	$162,000.00
Product Margin	$419,766.00	-$83,052.00	$336,714.00

Solution 3:

Quantity comparison of traditional cost assignment
Particulars	B300		T500		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Material Cost	$400,100	71.1%	$162,700	28.9%	$562,800
Direct Labor Cost	$120,400	73.9%	$42,500	26.1%	$162,900
Manufacturing Overhead cost	$391,300	73.9%	$138,125	26.1%	$529,425
Total cost assigned to products	$911,800		$343,325		$1,255,125
Total cost not assigned to product:
Selling and adminstrative Expenses					$570,000.00
Total Cost					$1,825,125

Quantity comparison of Activity Based cost assignment
Particulars	B300		T500		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Cost:
Material Cost	$400,100	71.1%	$162,700	28.9%	$562,800
Labor Cost	$120,400	73.9%	$42,500	26.1%	$162,900
Advertising Expense	$58,000	35.8%	$104,000	64.2%	$162,000
Indirect Cost:
Machining	$120,734	58.9%	$84,152	41.1%	$204,886
Setups	$32,400	19.9%	$130,500	80.1%	$162,900
Product sustaining	$50,600	50.0%	$50,600	50.0%	$101,200
Total Cost Assigned to Products	$782,234		$574,452		$1,356,686
Cost not assigned to products:
Manufacturing					$60,500
Selling and administrative					$408,000
Total Cost					$1,825,186