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 $ 1,714,000

Cost of goods sold 1,225,272

Gross margin 488,728

Selling and administrative expenses 600,000

Net operating loss $ (111,272 )

Hi-Tek produced and sold 60,300 units of B300 at a price of $20 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 $ 400,500 $ 162,600 $ 563,100

Direct labor $ 120,600 $ 42,300 162,900

Manufacturing overhead 499,272

Cost of goods sold $ 1,225,272

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 $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) $ 199,382 90,200 62,000 152,200

Setups (setup hours) 138,990 79 260 339

Product-sustaining (number of products) 100,400 1 1 2

Other (organization-sustaining costs) 60,500 NA NA NA

Total manufacturing overhead cost $ 499,272

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