PROBLEM 716 Comparing Traditional and Activity-Based Product Margins [LO71, LO73, LO74, LO75]
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 Manufacturing Inc.
Income Statement
Sales	$2,100,000
CoGS	$1,600,000
Gross Margin	$500,000
Selling & Admin. expense	$550,000
Net operating loss	$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 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
DM	$436,300	$251,700	$688,000
DL	$200,000	$104,000	$304,000
MOH			$608,000
CoGS			$1,600,000
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:
		Activity
activity cost pool (& activity measure)	MOH	B300	T500	Total
machining (machine-hours)	$213,500	90,000	62,500	152,500
setups (setup hours)	$157,500	75	300	375
product-sustanining (number of products)	$120,000	1	1	2
other (organization-sustaining costs)	$117,000	N/A	N/A	N/A
total MOH	$608,000
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.