Solve the below problem:
Q: 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 below:
Hi-Tek Manufacturing Inc.
Income Statement |
| Sales |
$ |
1,703,300 |
|
| Cost of goods sold |
|
1,198,792 |
|
| Gross margin |
|
504,508 |
|
| Selling and administrative expenses |
|
580,000 |
|
| Net operating loss |
$ |
(75,492) |
|
|
Hi-Tek produced and sold 60,400 units of B300 at a price of $20 per unit and 12,700 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:
|
B300 |
T500 |
Total |
| Direct materials |
$ |
400,000 |
|
|
$ |
162,500 |
|
|
$ |
562,500 |
|
| Direct labor |
$ |
120,700 |
|
|
$ |
42,900 |
|
|
|
163,600 |
|
| Manufacturing overhead |
|
|
|
|
|
|
|
|
|
472,692 |
|
| Cost of goods sold |
|
|
|
|
|
|
|
|
$ |
1,198,792 |
|
|
The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $59,000 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 |
Activity |
| Activity Cost Pool (and Activity Measure) |
Overhead |
|
|
B300 |
|
|
T500 |
|
|
Total |
|
| Machining (machine-hours) |
$ |
202,092 |
|
|
|
90,300 |
|
|
62,800 |
|
|
153,100 |
|
| Setups (setup hours) |
|
109,200 |
|
|
|
73 |
|
|
200 |
|
|
273 |
|
| Product-sustaining (number of products) |
|
100,600 |
|
|
|
1 |
|
|
1 |
|
|
2 |
|
| Other (organization-sustaining costs) |
|
60,800 |
|
|
|
NA |
|
|
NA |
|
|
NA |
|
| Total manufacturing overhead cost |
$ |
472,692 |
|
|
|
|
|
|
|
|
|
|
|
|
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.