Problem - Comparing Traditional and Activity-Based Product Margins
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 StatementSales$1,708,000Cost of goods sold1,260,095Gross margin447,905Selling and administrative expenses550,000Net operating loss$(102,095)Hi-Tek produced and sold 60,000 units of B300 at a price of $20 per unit and 12,700 units of T500 at a price of $40 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:
B300T500TotalDirect materials$400,800$162,400$563,200Direct labor$120,900$42,600163,500Manufacturing overhead533,395Cost of goods sold$1,260,095The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $53,000 and $108,000 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:
ManufacturingActivityActivity Cost Pool (and Activity Measure)OverheadB300T500TotalMachining (machine-hours)$208,92590,20062,300152,500Setups (setup hours)162,97079300379Product-sustaining (number of products)100,800112Other (organization-sustaining costs)60,700NANANATotal manufacturing overhead cost$533,395
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.