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., 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 $ 1,691,400 1,237,139 454,261 650,000 $ (195,739) Hi-Tek produced and sold 60,000 units of B300 at a price of $20 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 $ 400,100 $ 120,500 T500 Total Direct materials Direct labor Manufacturing overhead Cost of goods sold 163,000 563,100 163, 300 510,739 S 1,237,139 42,800 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 $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: 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 Manufacturing Overhead 200,299 149,240 100,800 B300 T500 Total 90,600 62,300 152,900 364 290 60,400 NA NA NA S 510,739 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

Answer 1

1)	predetermined overhead rate
	total estimated manufacturing overhead/total estimated direct labor dollars
	510739/163300
	3.127612
	product margin using traditional appraoch
					B300	T500	total
	sales				1200000	491400	1691400
	less:Expenses
	direct materials				400100	163000	563100
	direct labor				120500	42800	163300
	manufacturing OH applied @3.09				376877	133862	510739
	total manufacturing cost				897477	339662	1237139
	product margin				302523	151738	454261	answer
2)	ABC activity based
	Activity rates
					(a)	(b)	c=a/b
	Activity cost pools				total cost	total	Activity rate
						activity
	machining				200,299	152,900	1.31	per machine hour
	Setups				149,240	364	410	per setup hour
	product sustaining				100,800	2	50400	per product
	product margin under ABC accounting
					B300	T500	total
	sales				1200000	491400	1691400
	less:Expenses
	direct materials				400100	163000	563100
	direct labor				120500	42800	163300
	Advertising expense				56,000	104,000	160000
	manufacturing overhead assigned
	machining				118686	81613	200299
	Setups				30340	118900	149240
	product sustaining				50400	50400	100800
	total cost				776,026	560,713	1336739
	product margin				423974	-69313	354661
	Traditional cost system			B        300		T -500
3)					% of total		% of total	Total
				amount	amount	amount	amount	amount
	Traditional cost system
	Direct materials			400100	71.1%	163000	28.9%	563100
	direct labor			120500	73.8%	42800	26.2%	163300
	manufacturing overhead			376877	73.8%	133862	26.2%	510739
	total cost assigned to products							1237139
	selling & administrative cost							650,000
	total cost.							1887139
				B        300		T -500
					% of total		% of total	Total
				amount	amount	amount	amount	amount
	ABC based costing system
	Direct costs
	direct materials			400100	71.1%	163000	28.9%	563100
	direct labor			120500	73.8%	42800	26.2%	163300
	Advertising expense			56,000	35.0%	104,000	65.0%	160000
	Indirect costs:
	machining			118686	59.3%	81613	40.7%	200299
	Setups			30340	20.3%	118900	79.7%	149240
	product sustaining			50400	50.0%	50400	50.0%	100800
	total cost assigned to products			776026		560713		1336739
	cost not assigned to products
	Selling & administrative expense							490,000
	other							60,400
	total cost.							1887139