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	$	1,759,800
Cost of goods sold		1,248,243
Gross margin		511,557
Selling and administrative expenses		650,000
Net operating loss	$	(138,443	)

Hi-Tek produced and sold 60,400 units of B300 at a price of $21 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	$	400,600	$	162,300	$	562,900
Direct labor	$	120,000	$	43,000		163,000
Manufacturing overhead						522,343
Cost of goods sold					$	1,248,243

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 $106,000 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)	$	203,623		90,600	62,500	153,100
Setups (setup hours)		157,520		78	280	358
Product-sustaining (number of products)		101,000		1	1	2
Other (organization-sustaining costs)		60,200		NA	NA	NA
Total manufacturing overhead cost	$	522,343

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.

please help me i have worked on this for hours and i don't understand the product margins.

Answer 1

1)	predetermined overhead rate
	total estimated manufacturing overhead/total estimated direct labor dollars
	522343/163000
	3.204558
	product margin using traditional appraoch
					B300	T500	total
	sales				1268400	491400	1759800
	less:Expenses
	direct materials				400600	162300	562900
	direct labor				120000	43000	163000
	manufacturing OH applied @3.09				384547	137796	522343
	total manufacturing cost				905147	343096	1248243
	product margin				363253	148304	511557	answer
2)	ABC activity based
	Activity rates
					(a)	(b)	c=a/b
	Activity cost pools				total cost	total	Activity rate
						activity
	machining				203,623	153,100	1.33	per machine hour
	Setups				157,520	358	440	per setup hour
	product sustaining				101,000	2	50500	per product
	product margin under ABC accounting
					B300	T500	total
	sales				1268400	491400	1759800
	less:Expenses
	direct materials				400600	162300	562900
	direct labor				120000	43000	163000
	Advertising expense				57,000	106,000	163000
	manufacturing overhead assigned
	machining				120498	83125	203623
	Setups				34320	123200	157520
	product sustaining				50500	50500	101000
	total cost				782,918	568,125	1351043
	product margin				485482	-76725	408757
	Traditional cost system			B        300		T -500
3)					% of total		% of total	Total
				amount	amount	amount	amount	amount
	Traditional cost system
	Direct materials			400600	71.2%	162300	28.8%	562900
	direct labor			120000	73.6%	43000	26.4%	163000
	manufacturing overhead			384547	73.6%	137796	26.4%	522343
	total cost assigned to products							1248243
	selling & administrative cost							650,000
	total cost.							1898243
				B        300		T -500
					% of total		% of total	Total
				amount	amount	amount	amount	amount
	ABC based costing system
	Direct costs
	direct materials			400600	71.2%	162300	28.8%	562900
	direct labor			120000	73.6%	43000	26.4%	163000
	Advertising expense			57,000	35.0%	106,000	65.0%	163000
	Indirect costs:
	machining			120498	59.2%	83125	40.8%	203623
	Setups			34320	21.8%	123200	78.2%	157520
	product sustaining			50500	50.0%	50500	50.0%	101000
	total cost assigned to products			782918		568125		1351043
	cost not assigned to products
	Selling & administrative expense							487,000
	other							60,200
	total cost.							1898243