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	$ 1,659,600
Cost of goods sold	$1,230,949
Gross margin	428,651
Selling and administrative expenses	570,000
Net operating loss	$ (141,349 )

Hi-Tek produced and sold 60,400 units of B300 at a price of $19 per unit and 12,800 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	$ 400,700.00	$ 162,500.00	$    563,200.00
Direct Labor	$ 120,100.00	$   42,500.00	$    162,600.00
Manufacturing Overhead			$    505,149.00
Cost of goods sold			$ 1,230,949.00

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $51,000 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:

	Activity
Activity Cost Pool (and Activity Measure)	Manufacturing Overhead	B300	T500	Total
Machining (machine-hours)	$                     212,809	$   90,900.00	$       62,200.00	$ 153,100.00
Setups (setup hours)	$                       130,240	76	220	296
Product-sustaining (number of products)	$                    101,200	1	1	2
Other (organization-sustaining costs)	$                        60,900	NA	NA	NA
Total manufacturing overhead cost	$                   505,149

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