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	$	1,641,000
Cost of goods sold		1,245,234
Gross margin		395,766
Selling and administrative expenses		610,000
Net operating loss	$	(214,234	)

Hi-Tek produced and sold 60,300 units of B300 at a price of $19 per unit and 12,700 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	$	120,000	$	43,000		163,000
Manufacturing overhead						519,134
Cost of goods sold					$	1,245,234

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $54,000 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)	$	207,264		90,200	62,200	152,400
Setups (setup hours)		150,070		79	270	349
Product-sustaining (number of products)		101,000		1	1	2
Other (organization-sustaining costs)		60,800		NA	NA	NA
Total manufacturing overhead cost	$	519,134

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

Cost allocation and margins based on traditional costing:

	B300		T500		Total
Direct materials	$	4,00,600	$	1,62,500	$	5,63,100
Direct labor	$	1,20,000	$	43,000	$	1,63,000
Manufacturing overhead		382185	$	1,36,949	$	5,19,134
Cost of goods sold		9,02,785		3,42,449	$	12,45,234
Sales		11,45,700		4,95,300		16,41,000
Gross Margins		2,42,915		1,52,851		3,95,766

Cost allocation and margins based on Activity based costing:

	Manufacturing			Activity			Allocation
Activity Cost Pool (and Activity Measure)	Overhead			B300	T500	Total	B300	T500	Total
Machining (machine-hours)	$	2,07,264		90,200	62,200	1,52,400	1,22,672	84,592	2,07,264
Setups (setup hours)		1,50,070		79	270	349	33,970	1,16,100	1,50,070
Product-sustaining (number of products)		1,01,000		1	1	2	50,500	50,500	1,01,000
Other (organization-sustaining costs) Allocated based on Labour cost		60,800		1,20,000	43,000	1,63,000	44,761	16,039	60,800
Total manufacturing overhead cost	$	5,19,134					2,51,903	2,67,231	5,19,134
Direct materials							4,00,600	1,62,500	8,31,004
Direct labor							1,20,000	43,000	1,63,000
Cost of goods sold							7,72,503	4,72,731	12,45,234
Sales							11,45,700	4,95,300	16,41,000
Gross Margins							3,73,197	22,569	3,95,766