Hi-Tek Manufacturing Inc. makes two types of industrial component parts—the B300

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 below:

Hi-Tek produced and sold 60,400 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:

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 $108,000 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:

Required

1. Compute the product margins for the B300 and T500 under the company’s traditional costing system. (Do not round your overhead rate. Round your other intermediate and final answers to the nearest whole number.)

2. Compute the product margins for B300 and T500 under the activity-based costing system. (Negative product margins should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places.)

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Do not round your overhead rate. Round your other intermediate calculations and final answers to the nearest whole number. Round your "Percentage" answer to 1 decimal place. (i.e. .1234 should be entered as 12.3))

I need help on how to solve for number 2. Plus how to calcualte manufacturing overhead on number 3. I have been stuck on this for ages

Hi-Tek Manufacturing Inc.
Income Statement Sales $ 1,699,400 Cost of goods sold 1,226,357 Gross margin 473,043 Selling and administrative expenses 650,000 Net operating loss $ (176,957)

Explanation / Answer

1. Compute the product margins for the B300 and T500 under the company's traditional costing system. Plantwide overhead rate = Estimated total mfg. cost / Estimated total DL $ PMOH Rate = $4,99,957 / $1,63,400 $3 per DLS B300 T500 Total Sales $12,08,000 $4,91,400 $16,99,400 Direct materials $4,00,900 $1,62,100 $5,63,000 Direct labor 1,20,600 42,800 1,63,400 Manufacturing overhead applied 3,69,001 1,30,956 4,99,957 Total manufacturing costs $8,90,501 $3,35,856 $12,26,357 Product margin (Traditional) $3,17,499 $1,55,544 $4,73,043 Note: All of the mfg. overhead costs is applied to each product based on direct labor dollars 2. Compute the product margins for the B300 and T500 under the activity-based costing system. Cost 1st Stage Cost Pool Pool Activity Driver Usage Pool Activity Cost Pool Driver Allocations B300 T500 Total Rates Machining MHr. $2,03,357 90,200 62,700 1,52,900 $1.330 Setups Setup Hrs. 1,34,400 70 250 320 $420 Product Sustaining # of Products 1,01,600 1 1 2 $50,800 Organizational Sustaining NA 60,600 NA NA NA Total Mfg. Overhead $4,99,957 B300 T500 Total Sales $12,08,000 $4,91,400 $16,99,400 Direct materials $4,00,900 $1,62,100 $5,63,000 Direct labor 1,20,600 42,800 1,63,400 Advertising expense 52,000 1,08,000 1,60,000 Mfg. Overhead assigned      Machining pool 1,19,966 83,391 2,03,357      Setup pool 29,400 1,05,000 1,34,400      Product sustaining 50,800 50,800 1,01,600 Total costs assigned $7,73,666 $5,52,091 $13,25,757 Product margin (ABC) $4,34,334 ($60,691) $3,73,643 3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. B300 T500 Total Sales $12,08,000 $4,91,400 $16,99,400 Direct materials $4,00,900 $1,62,100 $5,63,000 Direct labor 1,20,600 42,800 $1,63,400 Manufacturing overhead applied 3,69,001 1,30,956 $4,99,957 Total manufacturing costs $8,90,501 $3,35,856 $12,26,357 Product margin (Traditional) $3,17,499 $1,55,544 $4,73,043 Selling & administrative 6,50,000      Net operating costs ($1,76,957) Note: Total costs accounted for $18,76,357 B300 T500 Total Sales $12,08,000 $4,91,400 $16,99,400 Direct materials $4,00,900 $1,62,100 $5,63,000 Direct labor 1,20,600 42,800 1,63,400 Advertising expense 52,000 1,08,000 1,60,000 Mfg. Overhead assigned      Machining pool 1,19,966 83,391 2,03,357      Setup pool 29,400 1,05,000 1,34,400      Product sustaining 50,800 50,800 1,01,600 Total costs assigned $7,73,666 $5,52,091 $13,25,757 Product margin (ABC) $4,34,334 ($60,691) $3,73,643 Selling & Administrative (Indirect) 4,90,000 Organizational Sustaining Costs 60,600 Net operating income ($1,76,957) Note: Total costs accounted for $18,76,357 Explain why the traditional and activity-based cost assignments differ. First: The traditional costing system assigns all $499,957 of mfg. overhead to the products. The ABC costing system does not assign organizational-sustaining costs to products. Second: The traditional costing system uses one unit-level allocation base, direct labor dollars,   to assign. B300 T500 Total      Consumption ratio: 0.74 0.26 100% The ABC costing system uses three different pool drivers. 1. Machine hours (unit-level driver) B300 T500 Total      Consumption ratio: 0.59 0.41 100% 2. Setup hours (batch-level driver) B300 T500 Total      Consumption ratio: 0.22 0.78 100% 3. Products (product-level driver) B300 T500 Total      Consumption ratio: 0.50 0.50 100% Third: The traditional system does not trace any non-manufacturing direct costs to the products. The ABC costing system traces direct advertising costs to the products.

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