Question

Problem 7-16 Comparing Traditional and Activity-Based Product Margins (L07-1, LO7-3, L07-4, LO7-5) 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 Cost of goods sold Gross margin Selling and administrative expenses Net operating loss 1,697,300 1,247,560 449,740 590,000 (140.260) 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: 8300 $ 400,500 $ 120.900 TSee $ 162,200 $ 42,800 Direct materials Direct labor Manufacturing overhead Cost of goods sold Total $ 562,700 163,700 521,160 $ 1,247,560 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $57,000 and $101,000 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: B300 90,500 77 Manufacturing Overhead $206,280 152.682 101,800 60,400 $ 521.160 Activity T500 62,300 270 152.869 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 347 NA NA

Answer 1

Solution 1:

Predetermined overhead rate = Estimated overhead / Estimated direct labor cost = $521,160 / $163,700 = $3.18 per direct labor dollar

Computation of Product Margin - Traditional Costing System
Particulars	B300	T500	Total
Sales (B300 - 60,100*$20, T500 - 12700*$39)	$1,202,000	$495,300	$1,697,300
Direct material	$400,500	$162,200	$562,700
Direct labor	$120,900	$42,800	$163,700
Manufacturing overhead (Direct labor * $3.18)	$384,462	$136,104	$520,566
Product Margin	$296,138	$154,196	$450,334

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	$206,280.00	Machine hours	152800	$1.35	90500	$122,175.00	62300	$84,105.00
Setups	$152,680.00	Setup hours	347	$440.00	77	$33,880.00	270	$118,800.00
Product sustaining	$101,800.00	Number of products	2	$50,900.00	1	$50,900.00	1	$50,900.00
Other	$60,400.00	No allocation
Total	$521,160.00					$206,955.00		$253,805.00

Computation of Product Margin - Activity based Costing System
Particulars	B300	T500	Total
Sales (B300 - 60,100*$20, T500 - 12700*$39)	$1,202,000	$495,300	$1,697,300
Direct material	$400,500	$162,200	$562,700
Direct labor	$120,900	$42,800	$163,700
Allocated Manufacturing overhead	$206,955.00	$253,805.00	$460,760
Advertising Expense	$57,000.00	$101,000.00	$158,000.00
Product Margin	$416,645.00	-$64,505.00	$352,140.00

Solution 3:

Quantity comparison of traditional cost assignment
Particulars	B300		T500		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Material Cost	$400,500	71.2%	$162,200	28.8%	$562,700
Direct Labor Cost	$120,900	73.9%	$42,800	26.1%	$163,700
Manufacturing Overhead cost	$384,462	73.9%	$136,104	26.1%	$520,566
Total cost assigned to products	$905,862		$341,104		$1,246,966
Total cost not assigned to product:
Selling and adminstrative Expenses					$590,000.00
Total Cost					$1,836,966

Quantity comparison of Activity Based cost assignment
Particulars	B300		T500		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Cost:
Material Cost	$400,500	71.2%	$162,200	28.8%	$562,700
Labor Cost	$120,900	73.9%	$42,800	26.1%	$163,700
Advertising Expense	$57,000	36.1%	$101,000	63.9%	$158,000
Indirect Cost:
Machining	$122,175	59.2%	$84,105	40.8%	$206,280
Setups	$33,880	22.2%	$118,800	77.8%	$152,680
Product sustaining	$50,900	50.0%	$50,900	50.0%	$101,800
Total Cost Assigned to Products	$785,355		$559,805		$1,345,160
Cost not assigned to products:
Manufacturing					$60,400
Selling and administrative					$432,000
Total Cost					$1,837,560