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	$	2,100,000
Cost of goods sold		1,600,000
Gross margin		500,000
Selling and administrative expenses		550,000
Net operating loss	$	(50,000	)

Hi-Tek produced and sold 70,000 units of B300 at a price of $20 per unit and 17,500 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	$	436,300	$	251,700	$	688,000
Direct labor	$	200,000	$	104,000		304,000
Manufacturing overhead						608,000
Cost of goods sold					$	1,600,000

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $50,000 and $100,000 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)	$	213,500		90,000	62,500	152,500
Setups (setup hours)		157,500		75	300	375
Product-sustaining (number of products)		120,000		1	1	2
Other (organization-sustaining costs)		117,000		NA	NA	NA
Total manufacturing overhead cost	$	608,000

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