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 parts-the B300 and the T500. An absorption costing income statement for the most recent period is shown: Hi-Tek Manufacturing Inc. Income Statement Sales $1,695,500 Cost of goods sold 1,250,076 Gross margin 445,424 Selling and administrative expenses 640,000 Net operating loss $ (194,576) Hi-Tek produced and sold 60,400 units of B300 at a price of $20 per unit and 12,500 units of T500 at a price of $39 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: Direct materials Direct labor Manufacturing overhead Cost of goods sold 8300 T500 Total $ 400,900 $ 162,100 $ 563,000 $ 120,300 $ 42,500 162,800 524,276 $1,250,076 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $56,000 and $106,000 of the company's advertising expenses could be directly traced to 1300 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 Activit Activity Cost Pool (and Activity Measure) Overhead T500 Machining (machine-hours) $ 202,356 90,680 62,780 Setups (setup hours) 159,720 73 290 Product-sustaining number of products) 101,600 Other (organization-sustaining costs) 60.600 Total manufacturing overhead cost $ 524,276 8300 1 NA 1 NA Direct materials Direct labor Manufacturing overhead Cost of goods sold B300 T500 Total $ 400,900 $ 162,100 $ 563,000 $ 120,300 $ 42,500 162,800 524,276 $1,250,076 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $56,000 and $106,000 of the company's advertising expenses could be directly traced to 8300 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 Activity Activity Cost Pool (and Activity Measure) Overhead T500 Total Machining (machine-hours) $ 202,356 90,600 62,700 153,300 Setups (setup hours) 159,720 363 Product-sustaining (number of products) 101,600 Other (organization-sustaining costs) 60,600 Total manufacturing overhead cost $ 524,276 B300 73 1 NA 290 1 NA 2 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, B300 T500 Total % of % of Amount Amount Amount Traditional Cost System % % delse Total cost assigned to products Total cost B300 T500 Total % of Total Amount % of Total Amount Amount Amount Amount Activity-Based Costing System Direct costs: % % % % % % Indirect costs: % % % % % % Total cost assigned to products
