ABC Costing System

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 below: Hi-Tek Manufacturing Inc. Income Statement Sales $2,100,000 Cost of goods sold 1,600,000 Gross margin 500,000 Sales and administrative expenses 550,000 Net operating loss [$50,000] HiTek produced and sold 70,000 units of B300 at a price of $20 per unit and 17,500 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 labour dollars as the allocation base. Additional information relating to the company's two product lines is shown below: 3300 T500 Total Manufacturing overhead -- $ 608,000 Cost of goods sold -- $1,600,000 The company has created an activity-based costing system to evaluate the profitability of its products. HiTek's ABC implementation team concluded that $50,000 and $100,000 of the company's advertising expenses could be directly traced to B300 and T500, respectively. The remainder of the selling and administrative expenses were organization-sustaining in nature. The ABC team also distributed the company's manufacturing overhead to four activities as shown below: Activity Activity Cost Pool (and Activity Manufacturing Measures) Overhead B300 T500 Total Machining (machine-hours) $213,500 90,000 |62,500 152,500 Setups (setup-hours) 157,500 75 300 375 Product-sustaining (number of products) 120,000 2 Other (organization-sustaining costs) 117,000 NA NA NA Total manufacturing overhead costs $608,000 Required: 1. Compute the product margins for the B3oo and T5oo under the company's traditional costing system. 2. Compute the product margins for B3oo and T5oo under the activity-based costing system.Use the following steps: la. Calculate overhead rate using the traditional method.(3 Marks) 1b. Calculate product margins using the traditional method.(10 Marks) B300 T500 Total 2a. Calculate the activity rate for each activity using ABC. (7 Marks) Activity Budgeted Cost Driver Rate 2b. Compute the Product Margin each model of phone using ABC.(10 Marks) B300 T500 Total