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	$	1,708,000
Cost of goods sold		1,228,693
Gross margin		479,307
Selling and administrative expenses		550,000
Net operating loss	$	(70,693	)

Hi-Tek produced and sold 60,000 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	$	400,800	$	162,600	$	563,400
Direct labor	$	120,400	$	42,400		162,800
Manufacturing overhead						502,493
Cost of goods sold					$	1,228,693

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 $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)	$	209,473		90,700	62,200	152,900
Setups (setup hours)		131,120		78	220	298
Product-sustaining (number of products)		101,200		1	1	2
Other (organization-sustaining costs)		60,700		NA	NA	NA
Total manufacturing overhead cost	$	502,493

Required:

1. Compute the product margins for the B300 and T500 under the company’s traditional costing system. This one I already have done!

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.

Required 2: Compute the product margins for B300 and T500 under the activity-based costing system. (Negative product margins should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places.)

	B300 T500 Total Product margin $0

Required 3: Prepare a quantitative comparison of traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answers to 1 decimal place and other answers to the nearest whole dollar amounts.)

B300 T500 Total % of % of Amount Amount Amount Traditional Cost System Direct materials % % Direct labor % % Manufacturing overhead % % The total cost assigned to products $0 $0 $0 Total cost $0 B300 T500 Total % of % of Amount Total Amount Amount Total Amount Amount Activity-Based Costing System Direct costs: Direct materials % % Direct labor % % % % Indirect costs: Machining % % Setups % % Product sustaining % % The total cost assigned to products $0 $0 0 Costs not assigned to products: Total cost $0

Answer 1

Answers 1 Product Margin under Traditional Costing | B300 L Product Margin 306764 2 Product Margin under Activity Based costing B300 L Product Margin 413621 T500 171984 Total 478748 T500 -36614 Total 377007

3. Quantitative Comparision of the Traditional and Activity Based Cost Assignments Quantitative comparsion of the Traditional Cost B300 I T500 563400 162800 503052 1229252 550000 1779252 Total Traditional Costing System Amount % Amount % Direct Material 400800 71.1% 162600 28.9% DirectLabor 120400 74.0% 42400 26.0% Manufacturing Overheads 372036 74.0% 131016 26.0% Total Cost Assigned to Products 893236 336016 Selling and Administrative Expenses Total Cost Quantitative Comparison of Acticity Based Cost Assignments | B300 T500 Activty Based Costing System Amount % Amount % Direct Cost Direct Material 400800 71.1% 162600 28.9% Direct Labor 120400 74.0% 42400 26.0% Advertisements (Traced) 56000 34.4% 107000 65.6% Indirect Cost Machining 124259 59.3% 85214 40.7% Batch setup 34320 26.2% 96800 73.8% Prodcut Sustainind 50600 50.0% 506001 50.0% Total Cost Assigned to Products 786379 544614 Cost Not asigned to the Products Selling and Administrative Expenses Others Total Cost 563400 162800 1630001 209473 131120 101200 1330993 387000 607001 17179931

Working Notes B300 T500 Total Selling Price 20 40 Direct Material 400800 162600 563400 Direct Labor 120400 424001 162800 Production in Units 60000 12700 72700 Manufacturing Overheads 502493 Advertisements (Traced) 56000 107000 Selling and Administrative Expenses 550000 Maufacturing OH 502493 Estimated Labor Dollars 162800 Predetermined Overhead Rate 3.09 502493/192800 MOH Activity B300 T500 Total Machining 209473 90700 6 2200 152900 Setups 131120 78 220 298 Prodcut sustaining 101200 1 1 Others 60700 502493 Traditional Costing System B300 T500 Total sales 1200000 5080001 1708000 Direct Material 400800 1626001 563400 Direct Labor 120400 42400 162800 Manufacturing Overheads (Rate *labour) 372036 1310161 503052 Total Manufacturing Cost 893236 3360161229252 Product Margin 306764 171984 478748

Determination of Activity Rate Activty Pool Machining Batch setup Prodcut Sustaining Activity Based Costing System Estimated OH 209473 131120 101200 Base Activity Rate 152900 298 440.00 2 50600.00 sales Direct Material Direct Labor Advertisements (Traced) Matching Activity *Rate) Batch Setup (Activity Rate) Prodcut Sustaining Total Cost Product Margin B300 1200000 400800 120400 56000 124259 34320 50600 786379 413621 T500 Total 508000 1708000 162600 563400 42400 162800 1070001 163000 85214 209473 96800 131120 50600 101200 544614 1330993 -36614 377007