Question

Problem 7-16 Comparing Traditional and Activity-Based Product Margins [LO7-1, LO7-3, LO7-4, LO7-5]

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	$	1,649,900
Cost of goods sold		1,209,425
Gross margin		440,475
Selling and administrative expenses		560,000
Net operating loss	$	(119,525)

Hi-Tek produced and sold 60,100 units of B300 at a price of $19 per unit and 12,700 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	$	400,800	$	162,400	$	563,200
Direct labor	$	121,000	$	42,500		163,500
Manufacturing overhead						482,725
Cost of goods sold					$	1,209,425

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $60,000 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:

	Manufacturing		Activity
Activity Cost Pool (and Activity Measure)	Overhead		B300	T500	Total
Machining (machine-hours)	$	201,085	90,500	63,000	153,500
Setups (setup hours)		120,540	74	220	294
Product-sustaining (number of products)		101,000	1	1	2
Other (organization-sustaining costs)		60,100	NA	NA	NA
Total manufacturing overhead cost	$	482,725

Required

1.	Compute the product margins for the B300 and T500 under the company’s traditional costing system. (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole dollars.)

      

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. (Round your intermediate calculations to 2 decimal places and "Percentage" answer to 1 decimal place. (i.e. .1234 should be entered as 12.3) and other answers to nearest whole dollar amounts.)

      

     

Answer 1

1)	predetermined overhead rate
	total estimated manufacturing overhead/total estimated direct labor dollars
	482725/163500
	2.952446
	product margin using traditional appraoch
					B300	T500	total
	sales				1141900	508000	1649900
	less:Expenses
	direct materials				400800	162400	563200
	direct labor				121000	42500	163500
	manufacturing OH applied @2.95				357246	125479	482725
	total manufacturing cost				879046	330379	1209425
	product margin				262854	177621	440475	answer
2)	ABC activity based
	Activity rates
					(a)	(b)	c=a/b
	Activity cost pools				total cost	total	Activity rate
						activity
	machining				201,085	153,500	1.31	per machine hour
	Setups				120,540	294	410	per setup hour
	product sustaining				101,000	2	50500	per product
	product margin under ABC accounting
					B300	T500	total
	sales				1141900	508000	1649900
	less:Expenses
	direct materials				400800	162400	563200
	direct labor				121000	42500	163500
	Advertising expense				60,000	108,000	168000
	manufacturing overhead assigned
	machining				118555	82530	201085
	Setups				30340	90200	120540
	product sustaining				50500	50500	101000
	total cost				781,195	536,130	1317325
	product margin				360705	-28130	332575
	Traditional cost system			B        300		T -500
3)					% of total		% of total	Total
				amount	amount	amount	amount	amount
	Traditional cost system
	Direct materials			400800	71.2%	162400	28.8%	563200
	direct labor			121000	74.0%	42500	26.0%	163500
	manufacturing overhead			357246	74.0%	125479	26.0%	482725
	total cost assigned to products							1209425
	selling & administrative cost							560,000
	total cost.							1769425
				B        300		T -500
					% of total		% of total	Total
				amount	amount	amount	amount	amount
	ABC based costing system
	Direct costs
	direct materials			400800	71.2%	162400	28.8%	563200
	direct labor			121000	74.0%	42500	26.0%	163500
	Advertising expense			60,000	35.7%	108,000	64.3%	168000
	Indirect costs:
	machining			118555	59.0%	82530	41.0%	201085
	Setups			30340	25.2%	90200	74.8%	120540
	product sustaining			50500	50.0%	50500	50.0%	101000
	total cost assigned to products			781195		536130		1317325
	cost not assigned to products
	Selling & administrative expense							392,000
	other							60,100
	total cost.							1769425