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 | 1,227,339 | ||
Gross margin | 480,661 | ||
Selling and administrative expenses | 620,000 | ||
Net operating loss | $ | (139,339 | ) |
Hi-Tek produced and sold 60,200 units of B300 at a price of $20 per unit and 12,600 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 | $ | 401,000 | $ | 162,600 | $ | 563,600 |
Direct labor | $ | 120,800 | $ | 43,000 | 163,800 | |
Manufacturing overhead | 499,939 | |||||
Cost of goods sold | $ | 1,227,339 | ||||
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 $104,000 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) | $ | 200,299 | 90,300 | 62,600 | 152,900 | |
Setups (setup hours) | 139,040 | 76 | 240 | 316 | ||
Product-sustaining (number of products) | 100,400 | 1 | 1 | 2 | ||
Other (organization-sustaining costs) | 60,200 | NA | NA | NA | ||
Total manufacturing overhead cost | $ | 499,939 | ||||
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.
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