FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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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 $ 1,703,300
Cost of goods sold 1,234,910
Gross margin 468,390
Selling and administrative expenses 560,000
Net operating loss $ (91,610)

 

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 $ 400,800 $ 162,300 $ 563,100
Direct labor $ 120,700 $ 43,000 163,700
Manufacturing overhead     508,110
Cost of goods sold     $ 1,234,910

 

The 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:

 

Activity Cost Pool (and Activity Measure) Manufacturing Overhead Activity
B300 T500 Total
Machining (machine-hours) $ 206,550 90,800 62,200 153,000
Setups (setup hours) 139,860 73 260 333
Product-sustaining (number of products) 101,600 1 1 2
Other (organization-sustaining costs) 60,100 NA NA NA
Total manufacturing overhead cost $ 508,110      

 

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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