PROBLEM 716 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 below:

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 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:

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Teks ABC implementation team concluded that $50,000 and $100,000 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:

Required: 1. Using Exhibit 713 as a guide, compute the product margins for the B300 and T500 under the companys traditional costing system. 2. Using Exhibit 711 as a guide, compute the product margins for B300 and T500 under the activity-based costing system. 3. Using Exhibit 714 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.

Guide:

OK

Hi-Tek Manufacturing Inc. Income Statement Cost of goods sold.... _ _ . . . . _ _ _ . . . . _ _ .. . 1,600,000 500,000 550,000 Selling and administrative expenses