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 $ 1,633,300

Cost of goods sold 1,227,154

Gross margin 406,146

Selling and administrative expenses 580,000

Net operating loss $ (173,854 )

Hi-Tek produced and sold 60,100 units of B300 at a price of $19 per unit and 12,600 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 $ 400,500 $ 162,900 $ 563,400

Direct labor $ 120,100 $ 42,700 162,800

Manufacturing overhead 500,954

Cost of goods sold $ 1,227,154

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $56,000 and $105,000 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) $ 200,904 90,200 62,000 152,200

Setups (setup hours) 139,050 79 230 309

Product-sustaining (number of products) 100,200 1 1 2

Other (organization-sustaining costs) 60,800 NA NA NA

Total manufacturing overhead cost $ 500,954

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