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 1,749,600 1,233,208 516,392 590,000 (73,608) Cost of goods sold Gross margin Selling and administrative expenses Net operating loss Hi-Tek produced and sold 60,100 units of B300 at a price of $21 per unit and 12,500 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 $ 400,000 $ 120,400 163,000 $ $42,400 Direct materials 563,000 162,800 Direct labor Manufacturing overhead 507,408 Cost of goods sold 1,233,208 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 $106,000 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:

Answer 1

Answers 1 Product Margin under Traditional Costing B300 Product Margin 366052 2 Product Margin under Activity Based costing B300 Product Margin 483964 T500 149812 Total 515864 T500 Total -647724 19192

3. Quantitative Comparision of the Traditional and Activity Based Cost Assignments Quantitative comparsion of the Traditional Cost B300 T500 T otal Traditional Costing System Direct Material DirectLabor Manufacturing Overheads Total Cost Assigned to Products Selling and Administrative Expenses Total Cost Amount 400000 120400 375648 896048 % 71.0% 74.0% 74.0% Amount 163000 42400 132288 337688 % 29.0% 26.0% 26.0% 563000 1628001 507936 1233736 590000 1823736

Total 563000 162800 158000 Quantitative Comparison of Acticity Based Cost Assignments B300 T500 Activty Based Costing System Amount % Amount % Direct Cost Direct Material 400000 71.0% 163000 29.0% Direct Labor 120400 74.0% 42400 26.0% Advertisements (Traced) 52000 32.9% 106000 67.1% Indirect Cost Machining 123216 59.1% 85272 40.9% Batch setup 31920 23.3% 105000 76.7% Prodcut Sustainind 50600 50.0% 50600 50.0% Total Cost Assigned to Products 778136 552272 Cost Not asigned to the Products Selling and Administrative Expenses Others 208488 136920 101200 1330408 432000 60800 Total Cost 1762408

21 Working Notes B300 T500 Total Selling Price 39 Direct Material 400000 163000| 563000 Direct Labor 120400 42400 162800 Production in Units 60100 1 2500 72600 Manufacturing Overheads 507408 Advertisements (Traced) 52000 106000 Selling and Administrative Expenses 590000 Maufacturing OH 507408 Estimated Labor Dollars 162800|| 2 Predetermined Overhead Rate 3.12 507408/162800 MOHD Activity B300 T500 Total Machining 208488 9 060062700 153300 Setups 136920 761 250 320 Prodcut sustaining 101200 Others 60800 507408 sales Direct Material Direct Labor Manufacturing Overheads Total Manufacturing Cost Product Margin Traditional Costing System B300 T500 12621001 487500 400000 163000 120400 42400 375648 132288 8960480 337688 366052 149812 Total 1749600 563000 162800 507936 1233736 515864

Determination of Activity Rate Activty Pool Machining Batch setup Prodcut Sustaining Estimated OH 208488 136920 101200 Base Activity Rate 153300 1.36 420.00 2 50600 326 Activity Based Costing System sales Direct Material Direct Labor Advertisements (Traced) Matching ( Activity *Rate) Batch Setup (Activity *Rate) Prodcut Sustaining Total Cost Product Margin B300 1262100 400000 120400 52000 123216 31920 50600 778136 483964 T500 Total 487500 1749600 163000 563000 42400 162800 106000 158000 85272 208488 105000 136920 50600 101200 552272 1330408 -64772 419192 41