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 Manufacturing Inc. Income Statement
Sales	$	1,644,800
Cost of goods sold		1,228,040
Gross margin		416,760
Selling and administrative expenses		570,000
Net operating loss	$	(153,240)

Hi-Tek produced and sold 60,500 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			$	162,900			$	563,500
Direct labor	$	120,800			$	42,300				163,100
Manufacturing overhead										501,440
Cost of goods sold									$	1,228,040

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 $104,000 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				Activity
Activity Cost Pool (and Activity Measure)	Overhead					B300			T500			Total
Machining (machine-hours)	$	201,300				90,100			62,400			152,500
Setups (setup hours)		139,440				72			260			332
Product-sustaining (number of products)		100,200				1			1			2
Other (organization-sustaining costs)		60,500				NA			NA			NA
Total manufacturing overhead cost	$	501,440

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))

Answer 1

Below tables help to solve as well as compare between the given two methods.

Please find table useful to compute desired results: -

End results would be as follows: -