Problem 5-16 Comparing Traditional and Activity-Based Product Margins [LO5-1, LO5-3, LO5-4, LO5-5) 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 $ Cost of goods sold Gross margin Seling and administrative expenses Net operating loss 1,774,500 1.235,631 538.000 630,000 191,131 Hi-Tek produced and sold 60,500 units of B300 at a price of $21 per unit and 12,600 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: 8300 T500 $ 401,000 $ 162.400 $ $ 120,500 $ 43,000 Direct materials Direct labor Manufacturing overhead Cost of goods sold Total 563,400 163,500 500,731 1235,691 The company has created an activity-based costing system to evaluate the profitability of its products. Hi- Tek's ABC implementation team concluded that $57,000 and $102,000 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: Manufacturing Overhead Activity Cost Pool (and Activity Measure) Machining machine hours) Setup (setup hours) Produd-sustaining number of products) Other (organization sustaining costs) Total manufacturing overhead cost 154 Activity 6.300 T500 90.000 52.700 250 1 NA NA $ 200.001 145, 140 100,400 60,100 E508.731 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. 3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. Problem 5-18 Activity-Based Costing and Bidding on Jobs [LO5-2, L05-3, L05-4) 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 $2.01 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 Removing to Thousands of quee so thousand square Number of jobs 400 Working on non routine jobs Number of one 100 jobs Other organization sustaining costs and de capacity costs) None Note: The 100 non routine jobs are included in the total of 400 jobs. Both non routine jobs and routine seguireestiming and setup Activity Cost Pool Activity Measure Total Activity Thousands of square Removing asbestos 850 thousand square feet feet Estimating and job setup Number of jobs 400 jobs Number of noroutine 100 no routine jobs Working on nonroutine jobs jobs Other (organization-sustaining costs and idle capacity costs) None Note: The 100 nonroutine jobs are included in the total of 400 jobs. Both monroutine jobs and routine jobs require estimating and setup Costs for the Year Wages and salaries $ 308,000 Disposal fees 706,000 Equipment depreciation 90.000 On-site supplies 50.000 Otice expenses 210,000 Licensing and insurance 410,000 Total cost 1.774.00 0 Distribution of Resource Consumption Across Activities Removing Estimating and Job Working on Nonroutine Othe Asbestos Setup Jobs r Total Wages and salaries 60% 10% 20% 10% 100% Disposal fees 70% 0% 30% 0% 100% Equipment depreciation 40% 5% 25% 30% 100% On-site supplies 70% 20% 10% 0% 100% Office expenses 15% 35% 20% 30% 100% Licensing and 25% 0% insurance 50% 25% 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