Hi-Tek Manufacturing, Inc., makes two types of industrial component parts—the B3

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 produced and sold 60,000 units of B300 at a price of $20 per unit and 12,600 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:

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $53,000 and $102,000 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.

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.

Hi-Tek Manufacturing Inc.
Income Statement Sales $ 1,704,000 Cost of goods sold 1,232,390 Gross margin 471,610 Selling and administrative expenses 610,000 Net operating loss $ (138,390 )

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 = $5,06,390 / $1,63,800 $3 per DLS B300 T500 Total Sales $12,00,000 $5,04,000 $17,04,000 Direct materials $4,00,200 $1,62,000 $5,62,200 Direct labor 1,20,900 42,900 1,63,800 Manufacturing overhead applied 3,73,764 1,32,626 5,06,390 Total manufacturing costs $8,94,864 $3,37,526 $12,32,390 Product margin (Traditional) $3,05,136 $1,66,474 $4,71,610 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. $2,09,610 90,900 62,100 1,53,000 $1.370 Setups Setup Hrs. 1,36,080 74 250 324 $420 Product Sustaining # of Products 1,00,600 1 1 2 $50,300 Organizational Sustaining NA 60,100 NA NA NA Total Mfg. Overhead $5,06,390 B300 T500 Total Sales $12,06,000 $5,00,000 $17,06,000 Direct materials $4,00,200 $1,62,000 $5,62,200 Direct labor 1,20,900 42,900 1,63,800 Advertising expense 53,000 1,02,000 1,55,000 Mfg. Overhead assigned      Machining pool 1,24,533 85,077 2,09,610      Setup pool 31,080 1,05,000 1,36,080      Product sustaining 50,300 50,300 1,00,600 Total costs assigned $7,80,013 $5,47,277 $13,27,290 Product margin (ABC) $4,25,987 ($47,277) $3,78,710 3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. B300 T500 Total Amount % of Amount % of Direct materials $4,00,200 71.2% $1,62,000 28.8% $5,62,200 Direct labor $1,20,900 73.8% $42,900 26.2% $1,63,800 Manufacturing overhead applied $3,73,764 73.8% $1,32,626 26.2% $5,06,390 Total manufacturing costs $8,94,864 $3,37,526 $12,32,390 Selling & administrative 6,10,000 Total Costs $18,42,390 Note: Total costs accounted for $18,42,390 B300 T500 Total Amount % of Amount % of Direct materials $4,00,200 71.2% $1,62,000 28.8% $5,62,200 Direct labor $1,20,900 73.8% $42,900 26.2% $1,63,800 Advertising expense $53,000 34.2% $1,02,000 65.8% $1,55,000 Mfg. Overhead assigned      Machining pool $1,24,533 59.4% $85,077 40.6% $2,09,610      Setup pool $31,080 22.8% $1,05,000 77.2% $1,36,080      Product sustaining $50,300 50.0% $50,300 50.0% $1,00,600 Total costs assigned $7,80,013 $5,47,277 $13,27,290 Selling & Administrative (Indirect) 4,55,000 Organizational Sustaining Costs 60,100 Total Costs $18,42,390 Explain why the traditional and activity-based cost assignments differ. First: The traditional costing system assigns all $506,390 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: 73.8% 26.2% 100% The ABC costing system uses three different pool drivers. 1. Machine hours (unit-level driver) B300 T500 Total      Consumption ratio: 59.4% 40.6% 100% 2. Setup hours (batch-level driver) B300 T500 Total      Consumption ratio: 22.8% 77.2% 100% 3. Products (product-level driver) B300 T500 Total      Consumption ratio: 50.0% 50.0% 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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