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	$	1,774,300
Cost of goods sold		1,251,130
Gross margin		523,170
Selling and administrative expenses		630,000
Net operating loss	$	(106,830	)

Hi-Tek produced and sold 60,300 units of B300 at a price of $21 per unit and 12,700 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	$	400,800	$	162,700	$	563,500
Direct labor	$	120,400	$	42,800		163,200
Manufacturing overhead						524,430
Cost of goods sold					$	1,251,130

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $55,000 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)	$	206,550		90,600	62,400	153,000
Setups (setup hours)		157,080		77	280	357
Product-sustaining (number of products)		100,200		1	1	2
Other (organization-sustaining costs)		60,600		NA	NA	NA
Total manufacturing overhead cost	$	524,430

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

solution: 1) product margin under traditional system Total ВЗ00 T500 1,266,300 508,0001,774,300 sales 400,800 162,700 Direct materials 563,500 Direct labor 120,400 163,200 42,800 Manufacturing overhead applied (direct labor 386,896 137,534 524,430 cost*3.21342)** total manufacturing cost 908,096 343,0341,251,130 Product margin 358,204 164,966 523,170 **overhead rate 3.21342 524430/163200 working 2) product margin under ABC Total ВЗ00 T500 В300 T500 1,266,300 508,000 Machining 62400 1.35 sales 90600*1.35 1,774,300 Setups 77*440 280*440 Product-sustaining 50100*1 400,800 162,700 50100*1 Direct materials 563,500 Direct labor 120,400 42,800 163,200 advertising exp 55,000 105,000 160,000 Manufacturing Activity Calculation of activity rate activity rate Machining 122,310 84,240 206,550 Activity Cost Pool (and Activity Measure) Overhead 33,880 123,200 Setups Total 157,080 50,100 Product-sustaining 50,100 100,200 Machining (machine-hours) 206550 153000 1.35 782,490 568,040 1,350,530 total manufacturing cost Setups (setup hours) 157080 357 440 Product-sustaining (number of products) 100200 2 50,100 Product margin 483,810 60,040 423,770 Sheet581 Sheet585 Sheet586 Sheet578 Sheet579 Sheet580 Sheet582 Sheet583 Sheet584 14:58 ENG 25/11/2019 UK

3) comparision Total B300 T500 % of total % of total amount amount Traditional cost system amount amount 71.1% 162,700 Direct materials 28.9% 400,800 563,500 26.2% Direct labor 73.8% 120,400 42,800 163,200 Manufacturing overhead applied 386,896 73.8% 137,534 524,430 26.2% total cost assigned to product 908,096 343,034 1,251,130 selling and administrative exp 630,000 total cost 1,881,130 Total T500 ВЗ00 % of total % of total amount amount Activity based costing amount amount direct cost 71.1% 162,700 Direct materials 28.9% 400,800 563,500 Direct labor 73.8% 26.2% 163,200 120,400 42,800 34.4% 105,000 advertising expense 65.6% 160,000 55,000 Indirect cost 59.2% 40.8% Machining 122,310 84,240 206,550 21.6% 123,200 78.4% 157,080 Setups 33,880 Product-sustaining 50,100 100,200 50,100 50.0% 50.0% total cost assigned to product 782,490 568,040 1,350,530 cost not assign ed to product selling and administrative exp (630000-160000) 470,000 Other (organization-sustaining costs) 60,600 total cost 1,881,130