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 Cost of goods sold Gross margin Selling and administrative expenses Net operating loss 1,763,400 1,219,880 543, 520 560,000 (16,480) $ Hi-Tek produced and sold 60,200 units of B300 at a price of $21 per unit and 12,800 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 $ 400,700 $ 120,100 T500 $ 162,100 $ 42,400 Direct materials Direct labor Manufacturing overhead Cost of goods sold Total $ 562,800 162,500 494,580 $ 1,219,880 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 $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 $ 203,490 130,290 100,400 60,400 $ 494,580 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 Activity B300 T500 90,200 62,800 73230 1 1 NA NA Total 153,000 303 2 NA

Answer 1

1)	predetermined overhead rate
	total estimated manufacturing overhead/total estimated direct labor dollars
	494580/162500
	3.043569
	product margin using traditional appraoch
					B300	T500	total
	sales				1264200	499200	1763400
	less:Expenses
	direct materials				400700	162100	562800
	direct labor				120100	42400	162500
	manufacturing OH applied @3.04				365533	129047	494580
	total manufacturing cost				886333	333547	1219880
	product margin				377867	165653	543520	answer
2)	ABC activity based
	Activity rates
					(a)	(b)	c=a/b
	Activity cost pools				total cost	total	Activity rate
						activity
	machining				203,490	153,000	1.33	per machine hour
	Setups				130,290	303	430	per setup hour
	product sustaining				100,400	2	50200	per product
	product margin under ABC accounting
					B300	T500	total
	sales				1264200	499200	1763400
	less:Expenses
	direct materials				400700	162100	562800
	direct labor				120100	42400	162500
	Advertising expense				52,000	104,000	156000
	manufacturing overhead assigned
	machining				119966	83524	203490
	Setups				31390	98900	130290
	product sustaining				50200	50200	100400
	total cost				774,356	541,124	1315480
	product margin				489844	-41924	447920
	Traditional cost system			B        300		T -500
3)					% of total		% of total	Total
				amount	amount	amount	amount	amount
	Traditional cost system
	Direct materials			400700	71.2%	162100	28.8%	562800
	direct labor			120100	73.9%	42400	26.1%	162500
	manufacturing overhead			365533	73.9%	129047	26.1%	494580
	total cost assigned to products							1219880
	selling & administrative cost							560,000
	total cost.							1779880
				B        300		T -500
					% of total		% of total	Total
				amount	amount	amount	amount	amount
	ABC based costing system
	Direct costs
	direct materials			400700	71.2%	162100	28.8%	562800
	direct labor			120100	73.9%	42400	26.1%	162500
	Advertising expense			52,000	33.3%	104,000	66.7%	156000
	Indirect costs:
	machining			119966	59.0%	83524	41.0%	203490
	Setups			31390	24.1%	98900	75.9%	130290
	product sustaining			50200	50.0%	50200	50.0%	100400
	total cost assigned to products			774356		541124		1315480
	cost not assigned to products
	Selling & administrative expense							404,000
	other							60,400
	total cost.							1779880