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 $ 1,768,000 Cost of goods sold 1,250,909 Gross margin 517,091 Selling and administrative expenses 590,000 Net operating loss $ (72,909 ) Hi-Tek produced and sold 60,000 units of B300 at a price of $21 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 $ 400,700 $ 162,600 $ 563,300 Direct labor $ 120,600 $ 42,400 163,000 Manufacturing overhead 524,609 Cost of goods sold $ 1,250,909 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $50,000 and $103,000 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) $ 210,569 91,000 62,700 153,700 Setups (setup hours) 152,040 72 290 362 Product-sustaining (number of products) 101,400 1 1 2 Other (organization-sustaining costs) 60,600 NA NA NA Total manufacturing overhead cost $ 524,609 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