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	$	1,703,200
Cost of goods sold		1,206,782
Gross margin		496,418
Selling and administrative expenses		570,000
Net operating loss	$	(73,582	)

Hi-Tek produced and sold 60,200 units of B300 at a price of $20 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		T500		Total
Direct materials	$	400,600	$	162,500	$	563,100
Direct labor	$	120,500	$	42,300		162,800
Manufacturing overhead						480,882
Cost of goods sold					$	1,206,782

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			Activity
Activity Cost Pool (and Activity Measure)				B300	T500	Total
Machining (machine-hours)	$	201,432		90,500	62,100	152,600
Setups (setup hours)		116,850		75	210	285
Product-sustaining (number of products)		101,800		1	1	2
Other (organization-sustaining costs)		60,800		NA	NA	NA
Total manufacturing overhead cost	$	480,882

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

Answer to Part 1.: Computation of Product Margins Using Traditional Approach: B300 T500 Total 1,204,000 499,200 1,703,200 Sales Costs: Direct Materials Direct Labor Manufacturing Overhead Applied Total Manufacturing Cost 400,600 120,500 355,935 877,035 162,500 42,300 124,947 329,747 563,100 162,800 480,882 1,206,782 Product Margin 326,965 169,453 496,418 Calculation: Predetermined Overhead Rate = Estimated Total Manufacturing Overhead Cost / Estimated Total DLH Predetermined Overhead Rate = $480,882 / $162,800 * 100 Predetermined Overhead Rate = 295.3821%

Activity Cost Pool Machining (Machine Hours) Answer to Part 2 Estimated Estimated Overhead Activity 201,432 152,600 MH Activity Rate 1.32 per MH per Setup 410 Hours 50,900 per Product Setups (Setup Hours) Product Sustaining 116,850 285 Setups 101,800 2 Calculation of Product Margins using Activity Based Costing System: B300 T500 Total 1,204,000 499,200 1,703,200 Sales Costs: Direct Materials Direct Labor Advertising Machining Setups Product Sustaining Total Costs 400,600 120,500 52,000 119,460 30,750 50,900 774,210 162,500 42,300 104,000 81,972 86,100 50,900 527,772 563,100 162,800 156,000 201,432 116,850 101,800 1,301,982 Product Margin 429,790 -28,572 401,218

Total Answer to Part 3. B300 % of Total Amount Amount T500 % of Total Amount Amount Amount Traditional Cost System: Direct Materials Direct Labor Manufacturing Overhead Total Costs assigned to Products 400,600 120,500 355,935 877,035 71.14% 74.02% 74.02% 162,500 42,300 124,947 329,747 28.86% 25.98% 25.98% 563,100 162,800 480,882 1,206,782

Total B300 % of Total Amount Amount T500 % of Total Amount Amount Amount 400,600 120,500 52,000 71.14% 74.02% 33.33% 162,500 42,300 104,000 28.86% 25.98% 66.67% 563,100 162,800 156,000 Activity Based Costing System: Direct Costs: Direct Materials Direct Labor Advertising Expense Indirect Costs: Supporting Direct Labor Batch Setups Product Sustaining Total Cost assigned to Products Cost not assigned to Products: Other Total Cost 119,460 30,750 50,900 774,210 59.31% 26.32% 50.00% 81,972 86,100 50,900 527,772 40.69% 73.68% 50.00% 201,432 116,850 101,800 1,301,982 60,800 1,362,782