1. Award: 8.33 points Hi-Tek Manufacturing, Inc., makes two types of industrial component partsthe B300 and the T500. An absorption costing income statement for the most recent period is shown: Hi-Tek Manufacturing Inc. Income Statement Sales Cost of goods sold Gross margin Selling and administrative expenses $ Net operating loss $ 1,762,100 1,231,144 530,956 620,000 (89,044) 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 $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 B300 $ 401,000 $ 120,400 Cost of goods sold T500 $ 162,400 $ 42,500 $ $ Total 563,400 162,900 504,844 1,231,144 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $58,000 and $101,000 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: 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 Overhead $ 207,944 135,000 101,400 60,500 $ 504,844 B300 90,800 70 1 NA Activity T500 62,100 230 1 NA 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. Total 152,900 300 2 NA 3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Compute the product margins for the B300 and T500 under the company's traditional costing system. (Round your intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.) B300 T500 Total Product margin $ 0 Required 1 Required 2 References Worksheet Learning Objective: 05-01 Understand activity-based costing and how it differs from a traditional costing system. Learning Objective: 05-04 Assign costs to a cost object using a second-stage allocation. Difficulty: 2 Medium Learning Objective: 05-03 Compute activity rates for cost pools. Learning Objective: 05-05 Use activity-based costing to compute product and customer margins. 2. Award: 8.33 points Mercer Asbestos Removal Company removes potentially toxic asbestos insulation and related products from buildings. There has been a long-simmering dispute between the company's estimator and the work supervisors. The on-site supervisors claim that the estimators do not adequately distinguish between routine work, such as removal of asbestos insulation around heating pipes in older homes, and nonroutine work, such as removing asbestos-contaminated ceiling plaster in industrial buildings. The on-site supervisors believe that nonroutine work is far more expensive than routine work and should bear higher customer charges. The estimator sums up his position in this way: \"My job is to measure the area to be cleared of asbestos. As directed by top management, I simply multiply the square footage by $2.50 to determine the bid price. Since our average cost is only $2.435 per square foot, that leaves enough cushion to take care of the additional costs of nonroutine work that shows up. Besides, it is difficult to know what is routine or not routine until you actually start tearing things apart.\" To shed light on this controversy, the company initiated an activity-based costing study of all of its costs. Data from the activity-based costing system follow: Activity Cost Pool Activity Measure Total Activity Removing asbestos Thousands of square feet 1,000 thousand square feet Estimating and job setup Number of jobs 500 jobs Working on nonroutine jobs Number of nonroutine jobs 100 nonroutine jobs Other (organization-sustaining costs and idle capacity costs) None Note: The 100 nonroutine jobs are included in the total of 500 jobs. Both nonroutine jobs and routine jobs require estimating and setup. Costs for the Year Wages and salaries Disposal fees Equipment depreciation On-site supplies Office expenses Licensing and insurance Total cost $ $ 406,000 793,000 96,000 58,000 280,000 502,000 2,135,000 Distribution of Resource Consumption Across Activities Wages and salaries Disposal fees Equipment depreciation On-site supplies Removing Asbestos 60% 60% 40% 70% Estimating and Job Setup 10% 0% 5% 20% Working on Nonroutine Jobs 20% 40% 20% 10% Other 10% 0% 35% 0% Total 100% 100% 100% 100% Office expenses Licensing and insurance 10% 30% 35% 0% 25% 50% 30% 20% 100% 100% Required: 1. Perform the first-stage allocation of costs to the activity cost pools. 2. Compute the activity rates for the activity cost pools. 3. Using the activity rates you have computed, determine the total cost and the average cost per thousand square feet of each of the following jobs according to the activity-based costing system. a. A routine 1,000-square-foot asbestos removal job. b. A routine 2,000-square-foot asbestos removal job. c. A nonroutine 2,000-square-foot asbestos removal job. Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3A to 3C Perform the first-stage allocation of costs to the activity cost pools. Removing asbestos Estimating and Job Setup Working on Nonroutine Jobs Other Total Wages and salaries Disposal fees Equipment depreciation On-site supplies Office expenses Licensing and insurance Total cost Req 1 Req 2 References Worksheet Learning Objective: 05-02 Assign costs to cost pools using a first-stage allocation. Learning Objective: 05-04 Assign costs to a cost object using a second-stage allocation. Difficulty: 2 Medium Learning Objective: 05-03 Compute activity rates for cost pools. 3. Award: 8.34 points Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services, the company has always charged a flat fee per hundred square feet of carpet cleaned. The current fee is $23.20 per hundred square feet. However, there is some question about whether the company is actually making any money on jobs for some customersparticularly those located on remote ranches that require considerable travel time. The owner's daughter, home for the summer from college, has suggested investigating this question using activity-based costing. After some discussion, she designed a simple system consisting of four activity cost pools. The activity cost pools and their activity measures appear below: Activity Cost Pool Cleaning carpets Travel to jobs Job support Other (organization-sustaining costs and idle capacity costs) Activity Measure Square feet cleaned (00s) Miles driven Number of jobs Activity for the Year 8,500 hundred square feet 226,500 miles 2,000 jobs None Not applicable The total cost of operating the company for the year is $357,000 which includes the following costs: Wages Cleaning supplies Cleaning equipment depreciation Vehicle expenses Office expenses President's compensation $ Total cost $ 146,000 27,000 14,000 26,000 69,000 75,000 357,000 Resource consumption is distributed across the activities as follows: Distribution of Resource Consumption Across Activities Cleaning Carpets Wages 75% Cleaning supplies 100% Cleaning equipment depreciation 69% Vehicle expenses 0% Office expenses 0% President's compensation 0% Travel to Jobs 11% 0% 0% 84% 0% 0% Job Support 0% 0% 0% 0% 61% 35% Other 14% 0% 31% 16% 39% 65% Total 100% 100% 100% 100% 100% 100% Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on. Required: 1. Prepare the first-stage allocation of costs to the activity cost pools. 2. Compute the activity rates for the activity cost pools. 3. The company recently completed a 200 square foot carpet-cleaning job at the Flying N Rancha 51-mile round-trip journey from the company's offices in Bozeman. Compute the cost of this job using the activity-based costing system. 4. The revenue from the Flying N Ranch was $46.40 (200 square feet @ $23.20 per hundred square feet). Calculate the customer margin earned on this job. Complete this ques on by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Prepare the first-stage allocation of costs to the activity cost pools. Cleaning Carpets Travel to Jobs Job Support Other Total Wages Cleaning supplies Cleaning equipment depreciation Vehicle expenses Office expenses President's compensation Total cost Required 1 Required 2 References Worksheet Learning Objective: 05-02 Assign costs to cost pools using a first-stage allocation. Learning Objective: 05-04 Assign costs to a cost object using a second-stage allocation. Difficulty: 2 Medium Learning Objective: 05-03 Compute activity rates for cost pools. Learning Objective: 05-05 Use activity-based costing to compute product and customer margins