Comparing Traditional and Activity-Based Product Margins 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.. $2,100,000 1,600,000 500,000 550,000 $ (50,000) Hi-Tek 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 labor dollars as the allocation base. Additional information relating to the company's two product lines is shown below: B300 $436,300 $200,000 T500 $251,700 $104,000 Total $ 688,000 304,000 608,000 $1,600,000 Direct materials ................. Direct labor .................... Manufacturing overhead ......... Cost of goods sold .............. 304, Cost of goods sold... $1.600.000 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek'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 was organization-sustaining in nature. The ABC team also distributed the company's manufacturing overhead to four activities as shown: Activity T500 Manufacturing Overhead Activity Cost Pool (and Activity Measure) B300 Total Machining (machine-hours).. Setups (setup hours) ....... Product-sustaining (number of products) ...... Other (organization-sustaining costs) .... Total manufacturing overhead cost..... $213,500 157,500 120,000 117,000 $608,000 90,000 62,500 152,500 75 300 375 11 2 Required: 1. Using Exhibit 7-13 as a guide, compute the product margins for the B300 and T500 under the company's traditional costing system. 2. Using Exhibit 7-11 as a guide, compute the product margins for B300 and T500 under the activity-based costing system. 3. Using Exhibit 7-14 as a guide, prepare a quantitative comparison of the traditional and activity-based cost assignments. Explain why the traditional and activity-based cost assignments differ Exhibit 713: Product Margins Traditional Cost System B C D E F G H I 1 Product Margins-Traditional Cost System Standard Stanchions $2 660 000 Custom Compass Housings $ 540.000 Total 53. 200.000 3 Sales 4 Cost of goods sold: 5 Direct materials 6 Direct labor 7 Manufacturing overhead 8 Product margin 9 Selling and administrative 10 Net operating income $ 905,500 263.750 875.000 $ 69.500 87.500 125.000 S 975 000 351 250 1.000.000 2044 250 $ $15.750 282.000 $ 258 000 2.326 250 873.750 876.000 112501 11 HO E xchbk 7-12 Exhibit 7-13 Exhibit 7-14 Exhbt7A-1 ExhOR 7A-2 Exhot 7A-3A Exhibit 7A-38 Exhibit 711: Product Margins - Activity-Based Costing B C D E F 1 Product Margins-Activity-Based Costing Standard Stanchions $ 2.660.000 Custom Compass Housings $ 540000 S $ 3 Sales 4 Costs 5 Direct materials 6 Direct labor Shipping Customer orders (from Exhibit 7-9) 9 Product design from Exhibit 7-9) 10 Order size from Exhibit 7-9) 11 Total cost 12 Product margin 13 905,500 263.750 60,000 192.000 69,500 87.500 5.000 128 000 252.000 47 500 332 500 1.753.750 906.250 589 500 149.500 $ ** Exhibit 7-5 Exhibit 7-6 Exhibit 77 Exhibit 7-9 Exhibt 7-10 Exhibit 7-11 Exhib Exhibit 714: A Comparison of Traditional and Activity-Based Cost Assignments 2 Traditional Cost System 3 Direct materials Direct labor Manufacturing overhead Total cost assigned to products Selling and administrative 8 Total cost Standard Stanchions ca Amount S 905.500 92 99 263.750 75.196 875.000 87 596 S2044 250 Custom Compass Housings (b) - c Amount 69.500 87.500 24.95 125000 12 590 282 000 Total s 975.000 351.250 1.000.000 2.326.250 875.000 S 3.201 250 0 ( 92.99 13 905.500 263.750 60.000 75.196 92.396 69.500 87.500 5.000 7.196 24.996 7.796 975.000 351.250 65.000 192.000 60.00 Activity-Based Costing System 11 Direct costs 12 Direct materials Direct labor Shipping 15 Indirect costs 16 Customer orders Product design Order size 19 Total cost assigned to products 20 Costs not assigned to prociucts 21 Customer relations Other 23 Total cost 0.09 40.096 100.000 12.595 128.000 252.000 47 500 589 500 87.596 332.500 320.000 252.000 380.000 2.343 250 51753 750 22 367.500 490 500 S3201 250 Exhibit 7-12 Exhibt 7-13 Exhibit 7-14 Exhibit 7A-1 Exhot 7A- 2