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 $ 1,647,800 Cost of goods sold 1,236,025 Gross margin 411,775 Selling and administrative expenses 580,000 Net operating loss $ (168,225 ) Hi-Tek produced and sold 60,200 units of B300 at a price of $19 per unit and 12,600 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 $ 400,300 $ 162,600 $ 562,900 Direct labor $ 120,900 $ 42,500 163,400 Manufacturing overhead 509,725 Cost of goods sold $ 1,236,025 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $52,000 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) $ 207,225 90,800 62,700 153,500 Setups (setup hours) 140,700 75 260 335 Product-sustaining (number of products) 100,800 1 1 2 Other (organization-sustaining costs) 61,000 NA NA NA Total manufacturing overhead cost $ 509,725 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