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	$	1,712,000
Cost of goods sold		1,216,105
Gross margin		495,895
Selling and administrative expenses		640,000
Net operating loss	$	(144,105	)

Hi-Tek produced and sold 60,400 units of B300 at a price of $20 per unit and 12,600 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:

	B300		T500		Total
Direct materials	$	400,200	$	162,200	$	562,400
Direct labor	$	120,200	$	42,600		162,800
Manufacturing overhead						490,905
Cost of goods sold					$	1,216,105

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $59,000 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)	$	213,365		90,800	62,700	153,500
Setups (setup hours)		116,440		74	210	284
Product-sustaining (number of products)		101,000		1	1	2
Other (organization-sustaining costs)		60,100		NA	NA	NA
Total manufacturing overhead cost	$	490,905

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.

B300 T500 Total % of - % of Amount Amount Amount Traditional Cost System Total cost assigned to products Total cost B300 Total % of Total Amount T500 % of Total Amount Amount Amount Amount Activity-Based Costing System Direct costs: Indirect costs: Total cost assigned to products Costs not assigned to products: Total cost

Answer 1

Total Manufacturing OH	490905
Total Direct Labor Dollars	162800
Overhead Per DL $	3.015
						B300	T500
	B300	T500			Direct Labor	120200	42600
Sales Price	20.00	40.00			Allocated MOH	362450	128455	(DL $*OH rate)
Less: Direct Material	6.63	12.87			Units	60400	12600
Less: Direct Labor	1.99	3.38			Allocated DL	6.00	10.19
Less: Maufacturing OH	6.00	10.19
Product Margin	5.38	13.55
	B300	T500			Activity Pools	Amt	B300	T500	Total	Per Driver
Sales Price	20.00	40.00			Machining	2,13,365	90,800	62,700	1,53,500	1.39
Less: Direct Material	6.63	12.87			Setups	1,16,440	74	210	284	410.00
Less: Direct Labor	1.99	3.38			Product Sustaining	1,01,000	1	1	2	50,500.00
Less: Maufacturing OH	3.43	17.76	From Right Side		Other	60,100	NA	NA	NA
Product Margin	7.96	5.99			Total M OH	4,90,905
					Allocation:	B300	T500
					Machining	126212	87153	(Activity Driver* Rate)
					Setups	30340	86100	(Activity Driver* Rate)
					Product Sustaining	50500	50500	(Activity Driver* Rate)
					Total M OH	207052	223753
					Units	60400	12600
	B300	T500			Manufacturing OH	3.43	17.76
	60400	12600
	B300		T500		Total
Traditional Cost System	Amount	%	Amount	%	Amount
Direct Material	4,00,200	45.3%	1,62,200	48.7%	5,62,400
Direct Labor	1,20,200	13.6%	42,600	12.8%	1,62,800
Manufacturing OH	3,62,450	41.1%	1,28,455	38.5%	4,90,905
Total Cost assigned to products	8,82,850	100.0%	3,33,255	100.0%	12,16,105
Activity Based Costing	Amount	%	Amount	%	Amount
Direct Costs:
Direct Material	4,00,200	55.0%	1,62,200	37.8%	5,62,400
Direct Labor	1,20,200	16.5%	42,600	9.9%	1,62,800
Indirect Costs:
Machining	1,26,212	17.3%	87,153	20.3%	2,13,365
Setups	30,340	4.2%	86,100	20.1%	1,16,440
Product Sustaining	50,500	6.9%	50,500	11.8%	1,01,000
Total Cost assigned to products	7,27,452	100.0%	4,28,553	100.0%	11,56,005
Costs not assigned to products:
Others					60100
Total Cost					12,16,105