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...

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$ 1,720,000
Cost of goods sold1,231,530
Gross margin488,470
Selling and administrative expenses570,000
Net operating loss$ (81,530)

Hi-Tek produced and sold 60,400 units of B300 at a price of $20 per unit and 12,800 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:

B300T500Total
Direct materials$ 400,700$ 162,900$ 563,600
Direct labor$ 120,200$ 42,800163,000
Manufacturing overhead504,930
Cost of goods sold$ 1,231,530

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $52,000 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 OverheadActivity
B300T500Total
Machining (machine-hours)$ 213,64090,10062,500152,600
Setups (setup hours)130,29073230303
Product-sustaining (number of products)100,600112
Other (organization-sustaining costs)60,400NANANA
Total manufacturing overhead cost$ 504,930

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.
Jul 15, 2022
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