Hi-Tek Manufacturing, Inc., makes two types of industrialcomponent parts—the B300 and the T500. An absorption costing incomestatement for the most recent period is shown:
Hi-Tek Manufacturing Inc.
Income Statement
Sales $ 1,633,300
Cost of goods sold 1,227,154
Gross margin 406,146
Selling and administrative expenses 580,000
Net operating loss $ (173,854 )
Hi-Tek produced and sold 60,100 units of B300 at a price of$19 per unit and 12,600 units of T500 at a price of $39 per unit.The company’s traditional cost system allocates manufacturingoverhead to products using a plantwide overhead rate and directlabor dollars as the allocation base. Additional informationrelating to the company’s two product lines is shown below:
B300 T500 Total
Direct materials $ 400,500 $ 162,900 $ 563,400
Direct labor $ 120,100 $ 42,700 162,800
Manufacturing overhead 500,954
Cost of goods sold $ 1,227,154
The company has created an activity-based costing system toevaluate the profitability of its products. Hi-Tek’s ABCimplementation team concluded that $56,000 and $105,000 of thecompany’s advertising expenses could be directly traced to B300 andT500, respectively. The remainder of the selling and administrativeexpenses was organization-sustaining in nature. The ABC team alsodistributed the company’s manufacturing overhead to four activitiesas shown below:
Manufacturing
Overhead Activity
Activity Cost Pool (and Activity Measure) B300 T500Total
Machining (machine-hours) $ 200,904 90,200 62,000152,200
Setups (setup hours) 139,050 79 230 309
Product-sustaining (number of products) 100,200 1 1 2
Other (organization-sustaining costs) 60,800 NA NA NA
Total manufacturing overhead cost $ 500,954
Required:
1. Compute the product margins for the B300 and T500 under thecompany’s traditional costing system.
2. Compute the product margins for B300 and T500 under theactivity-based costing system.
3. Prepare a quantitative comparison of the traditional andactivity-based cost assignments.
