Problem 7-16 Comparing Traditional and Activity-Based Product Margins [LO7-1, LO7-3, LO7-4, LO7-5]

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
Sales	$	1,708,000
Cost of goods sold		1,228,693
Gross margin		479,307
Selling and administrative expenses		550,000
Net operating loss	$	(70,693	)

Hi-Tek produced and sold 60,000 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	$	400,800	$	162,600	$	563,400
Direct labor	$	120,400	$	42,400		162,800
Manufacturing overhead						502,493
Cost of goods sold					$	1,228,693

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Teks ABC implementation team concluded that $56,000 and $107,000 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)	$	209,473		90,700	62,200	152,900
Setups (setup hours)		131,120		78	220	298
Product-sustaining (number of products)		101,200		1	1	2
Other (organization-sustaining costs)		60,700		NA	NA	NA
Total manufacturing overhead cost	$	502,493

Required:

1. Compute the product margins for the B300 and T500 under the companys traditional costing system. This one I already have done!

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.

Required 2: Compute the product margins for B300 and T500 under the activity-based costing system. (Negative product margins should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places.)

	B300	T500	Total
Product margin			$0

Required 3: Prepare a quantitative comparison of traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answers to 1 decimal place and other answers to the nearest whole dollar amounts.)

	B300			T500			Total
		% of			% of
	Amount			Amount			Amount
Traditional Cost System
Direct materials			%			%
Direct labor			%			%
Manufacturing overhead			%			%
The total cost assigned to products	$0			$0			$0
Total cost							$0
	B300			T500			Total
		% of			% of
	Amount	Total Amount		Amount	Total Amount		Amount
Activity-Based Costing System
Direct costs:
Direct materials			%			%
Direct labor			%			%
			%			%
Indirect costs:
Machining			%			%
Setups			%			%
Product sustaining			%			%
The total cost assigned to products	$0			$0			0
Costs not assigned to products:
Total cost							$0