Question

Problem 7-16 Comparing Traditional and Activity-Based Product Margins (LO7-1, LO7-3, LO7-4, LO7-5) 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 $1,709, 200 Cost of goods sold 1,233,722 Gross margin 475,478 Selling and administrative expenses 650,000 Net operating loss $ (174,522) Hi-Tek produced and sold 60.500 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. Direct materials Direct labor Manufacturing overhead Cost of goods sold B300 T500 Total $400,100 $162,800 $ 562,900 $120,400 $ 42,200 162,600 588,222 $1,233,722

Answer 1

Solution 1:

Predetermined overhead rate = Estimated overhead / Estimated direct labor cost = $508,222 / $162,600 = $3.13 per direct labor dollar

Computation of Product Margin - Traditional Costing System
Particulars	B300	T500	Total
Sales (B300 - 60,500*$20, T500 - 12800*$39)	$1,210,000	$499,200	$1,709,200
Direct material	$400,100	$162,800	$562,900
Direct labor	$120,400	$42,200	$162,600
Manufacturing overhead (Direct labor * $3.13)	$376,852	$132,086	$508,938
Product Margin	$312,648	$162,114	$474,762

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	$211,002.00	Machine hours	152900	$1.38	90400	$124,752.00	62500	$86,250.00
Setups	$136,120.00	Setup hours	332	$410.00	72	$29,520.00	260	$106,600.00
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	$508,222.00					$204,372.00		$242,950.00

Computation of Product Margin - Activity based Costing System
Particulars	B300	T500	Total
Sales (B300 - 60,500*$20, T500 - 12800*$39)	$1,210,000	$499,200	$1,709,200
Direct material	$400,100	$162,800	$562,900
Direct labor	$120,400	$42,200	$162,600
Allocated Manufacturing overhead	$204,372.00	$242,950.00	$447,322
Advertising Expense	$55,000.00	$101,000.00	$156,000.00
Product Margin	$430,128.00	-$49,750.00	$380,378.00

Solution 3:

Quantity comparison of traditional cost assignment
Particulars	B300	T500	Total
Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Material Cost	$400,100	71.1%	$162,800	28.9%	$562,900
Direct Labor Cost	$120,400	74.0%	$42,200	26.0%	$162,600
Manufacturing Overhead cost	$376,852	74.0%	$132,086	26.0%	$508,938
Total cost assigned to products	$897,352		$337,086		$1,234,438
Total cost not assigned to product:
Selling and adminstrative Expenses					$650,000.00
Total Cost					$1,884,438

Quantity comparison of Activity Based cost assignment
Particulars	B300	T500	Total
Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Cost:
Material Cost	$400,100	71.1%	$162,800	28.9%	$562,900
Labor Cost	$120,400	74.0%	$42,200	26.0%	$162,600
Advertising Expense	$55,000	35.3%	$101,000	64.7%	$156,000
Indirect Cost:
Machining	$124,752	59.1%	$86,250	40.9%	$211,002
Setups	$29,520	21.7%	$106,600	78.3%	$136,120
Product sustaining	$50,100	50.0%	$50,100	50.0%	$100,200
Total Cost Assigned to Products	$779,872		$548,950		$1,328,822
Cost not assigned to products:
Manufacturing					$60,900
Selling and administrative					$494,000
Total Cost					$1,883,722