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	$	1,703,300
Cost of goods sold		1,257,146
Gross margin		446,154
Selling and administrative expenses		570,000
Net operating loss	$	(123,846	)

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 $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	$	400,000	$	162,300	$	562,300
Direct labor	$	120,300	$	43,000		163,300
Manufacturing overhead						531,546
Cost of goods sold					$	1,257,146

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $56,000 and $105,000 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)	$	201,696		90,700	62,100	152,800
Setups (setup hours)		168,750		75	300	375
Product-sustaining (number of products)		100,200		1	1	2
Other (organization-sustaining costs)		60,900		NA	NA	NA
Total manufacturing overhead cost	$	531,546

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.

Answer 1

Solution 1:

Computation of Product Margin - Traditional Costing System
Particulars	B300	T500	Total
Sales (B300 - 60,400*$20, T500 - 12700*$39)	$1,208,000	$495,300	$1,703,300
Direct material	$400,000	$162,300	$562,300
Direct labor	$120,300	$43,000	$163,300
Manufacturing overhead (Direct labor * $3.25503)	$391,580	$139,966	$531,546
Product Margin	$296,120	$150,034	$446,154

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	$201,696.00	Machine hours	152800	$1.32	90700	$119,724.00	62100	$81,972.00
Setups	$168,750.00	Setup hours	375	$450.00	75	$33,750.00	300	$135,000.00
Product sustaining	$100,200.00	Number of products	2	$50,100.00	1	$50,100.00	1	$50,100.00
Other	$60,900.00	No allocation
Total	$531,546.00					$203,574.00		$267,072.00

Computation of Product Margin - Activity based Costing System
Particulars	B300	T500	Total
Sales (B300 - 60,400*$20, T500 - 12700*$39)	$1,208,000	$495,300	$1,703,300
Direct material	$400,000	$162,300	$562,300
Direct labor	$120,300	$43,000	$163,300
Allocated Manufacturing overhead	$203,574.00	$267,072.00	$470,646
Advertising Expense	$56,000.00	$105,000.00	$161,000.00
Product Margin	$428,126.00	-$82,072.00	$346,054.00

Solution 3:

Quantity comparison of traditional cost assignment
Particulars	B300		T500		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Material Cost	$400,000	71.1%	$162,300	28.9%	$562,300
Direct Labor Cost	$120,300	73.7%	$43,000	26.3%	$163,300
Manufacturing Overhead cost	$391,580	73.7%	$139,966	26.3%	$531,546
Total cost assigned to products	$911,880		$345,266		$1,257,146
Total cost not assigned to product:
Selling and administrative Expenses					$570,000.00
Total Cost					$1,827,146

Quantity comparison of Activity Based cost assignment
Particulars	B300		T500		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Cost:
Material Cost	$400,000	71.1%	$162,300	28.9%	$562,300
Labor Cost	$120,300	73.7%	$43,000	26.3%	$163,300
Advertising Expense	$56,000	34.8%	$105,000	65.2%	$161,000
Indirect Cost:
Machining	$119,724	59.4%	$81,972	40.6%	$201,696
Setups	$33,750	20.0%	$135,000	80.0%	$168,750
Product sustaining	$50,100	50.0%	$50,100	50.0%	$100,200
Total Cost Assigned to Products	$779,874		$577,372		$1,357,246
Cost not assigned to products:
Manufacturing					$60,900
Selling and administrative					$409,000
Total Cost					$1,827,146