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.
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 | $ | 1,644,800 | |
| Cost of goods sold | 1,220,217 | ||
| Gross margin | 424,583 | ||
| Selling and administrative expenses | 590,000 | ||
| Net operating loss | $ | (165,417 | ) |
Hi-Tek produced and sold 60,500 units of B300 at a price of $19 per unit and 12,700 units of T500 at a price of $39 per unit. The company’s traditional cost system allocates manufacturing
| B300 | T500 | Total | ||||
| Direct materials | $ | 400,700 | $ | 162,100 | $ | 562,800 |
| Direct labor | $ | 120,700 | $ | 42,100 | 162,800 | |
| Manufacturing overhead | 494,617 | |||||
| Cost of goods sold | $ | 1,220,217 | ||||
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 $106,000 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 | |||||
| Activity Cost Pool (and Activity Measure) | B300 | T500 | Total | |||
| Machining (machine-hours) | $ | 200,037 | 90,200 | 62,500 | 152,700 | |
| Setups (setup hours) | 132,880 | 72 | 230 | 302 | ||
| Product-sustaining (number of products) | 101,600 | 1 | 1 | 2 | ||
| Other (organization-sustaining costs) | 60,100 | NA | NA | NA | ||
| Total |
$ | 494,617 | ||||
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.
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