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 $ 1,716,000

Cost of goods sold 1,249,984

Gross margin 466,016

Selling and administrative expenses 600,000

Net operating loss $ (133,984 )

Hi-Tek produced and sold 60,400 units of B300 at a price of $20 per unit and 12,700 units of T500 at a price of $40 per unit. The companys 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 companys two product lines is shown below:

B300 T500 Total

Direct materials $ 400,300 $ 162,100 $ 562,400

Direct labor $ 120,900 $ 42,900 163,800

Manufacturing overhead 523,784

Cost of goods sold $ 1,249,984

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Teks ABC implementation team concluded that $60,000 and $109,000 of the companys 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 companys manufacturing overhead to four activities as shown below:

Manufacturing

Overhead Activity

Activity Cost Pool (and Activity Measure) B300 T500 Total

Machining (machine-hours) $ 208,624 90,800 62,600 153,400

Setups (setup hours) 152,460 73 290 363

Product-sustaining (number of products) 101,800 1 1 2

Other (organization-sustaining costs) 60,900 NA NA NA

Total manufacturing overhead cost $ 523,784

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.

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