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	$	1,635,300
Cost of goods sold		1,226,668
Gross margin		408,632
Selling and administrative expenses		640,000
Net operating loss	$	(231,368	)
Hi-Tek produced and sold 60,000 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 $ 400,200 $ 162,100 $ 562,300 Direct labor $ 120,700 $ 42,200 162,900 Manufacturing overhead 501,468 Cost of goods sold $ 1,226,668 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $58,000 and $102,000 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) $ 208,788 90,200 62,200 152,400 Setups (setup hours) 131,580 76 230 306 Product-sustaining (number of products) 100,200 1 1 2 Other (organization-sustaining costs) 60,900 NA NA NA Total manufacturing overhead cost $ 501,468 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