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: 25 points Skipped Hi-Tek Manufacturing Inc. Income Statement Sales $1,716,000 Cost of goods sold 1,236,630 Gross margin 479,370 Selling and administrative expenses 590,000 Net operating loss $ (110,630) Hi-Tek produced and sold 60,400 units of B300 at a price of $20 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. References Direct materials Direct labor Manufacturing overhead Cost of goods sold B380T500 Total $400,000 $162,100 $ 562,180 $120,780 $ 42,500 163,200 511,330 $1,236,630 The company has created an activity based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $51,000 and $103,000 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. Activity Cost Pool (and Activity Measure) Machining (machine-hours) Setups (setup hours) Product-sustaining (number of products) Other (organization-sustaining costs) Total manufacturing overhead cost Manufacturing Activity Overhead B380 T580 Total $206,010 90,100 62,500 152,600 143,220 71 270 341 102,000 60,100 NA NA NA $511,330 Required: 1. Compute the product margins for the B300 and T500 under the company's traditional costing system. 2. Compute the product margins for 8300 and T500 under the activity-based costing system. 3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.

Answer 1

1)	predetermined overhead rate
	total estimated manufacturing overhead/total estimated direct labor dollars
	511330/163200
	3.13315
	product margin using traditional appraoch
					B300	T500	total
	sales				1208000	508000	1716000
	less:Expenses
	direct materials				400000	162100	562100
	direct labor				120700	42500	163200
	manufacturing OH applied @3.13				378171	133159	511330
	total manufacturing cost				898871	337759	1236630
	product margin				309129	170241	479370	answer
2)	ABC activity based
	Activity rates
					(a)	(b)	c=a/b
	Activity cost pools				total cost	total	Activity rate
						activity
	machining				206,010	152,600	1.35	per machine hour
	Setups				143,220	341	420	per setup hour
	product sustaining				102,000	2	51000	per product
	product margin under ABC accounting
					B300	T500	total
	sales				1208000	508000	1716000
	less:Expenses
	direct materials				400000	162100	562100
	direct labor				120700	42500	163200
	Advertising expense				51,000	103,000	154000
	manufacturing overhead assigned
	machining				121635	84375	206010
	Setups				29820	113400	143220
	product sustaining				51000	51000	102000
	total cost				774,155	556,375	1330530
	product margin				433845	-48375	385470
	Traditional cost system			B        300		T -500
3)					% of total		% of total	Total
				amount	amount	amount	amount	amount
	Traditional cost system
	Direct materials			400000	71.2%	162100	28.8%	562100
	direct labor			120700	74.0%	42500	26.0%	163200
	manufacturing overhead			378171	74.0%	133159	26.0%	511330
	total cost assigned to products							1236630
	selling & administrative cost							590,000
	total cost.							1826630
				B        300		T -500
					% of total		% of total	Total
				amount	amount	amount	amount	amount
	ABC based costing system
	Direct costs
	direct materials			400000	71.2%	162100	28.8%	562100
	direct labor			120700	74.0%	42500	26.0%	163200
	Advertising expense			51,000	33.1%	103,000	66.9%	154000
	Indirect costs:
	machining			121635	59.0%	84375	41.0%	206010
	Setups			29820	20.8%	113400	79.2%	143220
	product sustaining			51000	50.0%	51000	50.0%	102000
	total cost assigned to products			774155		556375		1330530
	cost not assigned to products
	Selling & administrative expense							436,000
	other							60,100
	total cost.							1826630