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, Incorporated, 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 Incorporated Income Statement |
|
| Sales | $ 2,100,000 |
|---|---|
| Cost of goods sold | 1,600,000 |
| Gross margin | 500,000 |
| Selling and administrative expenses | 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 company’s traditional cost system allocates manufacturing
| B300 | T500 | Total | |
|---|---|---|---|
| Direct materials | $ 436,300 | $ 251,700 | $ 688,000 |
| Direct labor | $ 200,000 | $ 104,000 | 304,000 |
| Manufacturing overhead | 608,000 | ||
| Cost of goods sold | $ 1,600,000 |
The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $50,000 and $100,000 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:
| Activity Cost Pool (and Activity Measure) | Manufacturing Overhead | Activity | ||
|---|---|---|---|---|
| B300 | T500 | Total | ||
| Machining (machine-hours) | $ 213,500 | 90,000 | 62,500 | 152,500 |
| Setups (setup hours) | 157,500 | 75 | 300 | 375 |
| Product-sustaining (number of products) | 120,000 | 1 | 1 | 2 |
| Other (organization-sustaining costs) | 117,000 | NA | NA | NA |
| Total |
$ 608,000 |
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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