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:

Hi-Tek Manufacturing Inc. Income Statement
Sales	$	1,714,000
Cost of goods sold		1,248,178
Gross margin		465,822
Selling and administrative expenses		630,000
Net operating loss	$	(164,178	)

Hi-Tek produced and sold 60,100 units of B300 at a price of $20 per unit and 12,800 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	$	162,200	$	562,500
Direct labor	$	120,300	$	42,500		162,800
Manufacturing overhead						522,878
Cost of goods sold					$	1,248,178

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $53,000 and $107,000 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)	$	212,948		90,300	62,900	153,200
Setups (setup hours)		148,830		73	290	363
Product-sustaining (number of products)		101,000		1	1	2
Other (organization-sustaining costs)		60,100		NA	NA	NA
Total manufacturing overhead cost	$	522,878

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