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	$	1,691,400
Cost of goods sold		1,219,910
Gross margin		471,490
Selling and administrative expenses		570,000
Net operating loss	$	(98,510	)

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 $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	$	400,400	$	162,200	$	562,600
Direct labor	$	120,500	$	42,400		162,900
Manufacturing overhead						494,410
Cost of goods sold					$	1,219,910

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 $101,000 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)	$	201,960		90,100	62,900	153,000
Setups (setup hours)		130,950		71	220	291
Product-sustaining (number of products)		100,800		1	1	2
Other (organization-sustaining costs)		60,700		NA	NA	NA
Total manufacturing overhead cost	$	494,410

Required:

1. Compute the product margins for the B300 and T500 under the company’s traditional costing system.

	B300 T500 Total Product margin

2. Compute the product margins for B300 and T500 under the activity-based costing system.

	B300 T500 Total Product margin

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.

	B300 T500 Total % of % of Amount Amount Amount Traditional Cost System % % % % % % Total cost assigned to products Total cost B300 T500 Total % of % of Amount Total Amount Amount Total Amount Amount Activity-Based Costing System ............ ............ Direct costs: % % % % % % Indirect costs: % % % % % % Total cost assigned to products Costs not assigned to products: Total cost

Answer 1