Question

1 Problem 7-16 Comparing Traditional and Activity-Based Product Margins (LO7-1, LO7-3, LO7-4, LO7-5) 5 points 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: eBook Hi-Tek Manufacturing Inc. Income Statement Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating loss $1,714,000 1,244,230 469, 770 550,000 $ (80,230) Print References Hi-Tek produced and sold 60,300 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: Direct materials Direct labor Manufacturing overhead Cost of goods sold B300 T500 Total $ 400,100 $ 163,000 $ 563, 100 $ 120,900 $ 42,200 163, 100 518,030 $1,244,230 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: B300 Activity Cost Pool (and Activity Measure) Machining (machine-hours) Setups (setup hours) Product-sustaining (number of products) Other (organization-sustaining costs) Total manufacturing overhead cost Manufacturing Activity Overhead T500 Total $ 207, 360 91,000 62,600 153,600 150,070 79 270 349 100, 400 1 1 2 60,200 ΝΑ NA NA $ 518,030 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

Requirement 1 Traditional Costing System B300 T500 Total 1206000 508000 1714000 Sales Cost Direct Material Direct labor Manufacturing overhead Product Margin 400100 163000 120900 42200 383996.5 134033.5 301004 168766 563100 163100 518030 469770 Requirement 2 Activity Based Costing B300 T500 Total 1206000 508000 1714000 400100 120900 163000 42200 563100 163100 Sales Cost Direct Material Direct labor Manufacturing overhead Machining Setup Product Sustaining Product Margin 122850 33970 50200 477980 84510 116100 50200 51990 207360 150070 100400 529970