Question

Problem 7-16 Comparing Traditional and Activity-Based Product Margins [LO7-1, L07-3, LO7-4, LO7-5) 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 boints $ Hi-Tek Manufacturing Inc. Income Statement Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating loss 1,716.00 1,212,566 503.434 560.000 (56,566) Hi-Tek produced and sold 60,200 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 References Direct materials Direct labor Manufacturing overhead Cost of goods sold B300 $401,00 $ 120,100 T500 $ 162,300 $ 42,680 Total $ 563,300 162,700 486,566 $ 1.212.566 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 $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: Activity Boo T500 90,500 62,100 72220 Total 152.600 Manufacturing Overhead $ 199,906 125.560 10.200 50,900 $456.566 Activity Cost Pool (and Activity Measure) Machining (machine hours) Setups (setup hours) Product-sustaining (number of products) Other (organization-sustaining costs) Total manufacturing overhead cost 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

Answer 1

1.

	B300	T500	Total
Sales Revenue	$        1,204,000	$       512,000	$     1,716,000
Costs
Direct Material	$            401,000	$       162,300	$         563,300
Direct Labor	$            120,100	$          42,600	$         162,700
Overhead	$            359,168	$       127,398	$         486,566
Total Cost	$            880,268	$       332,298	$     1,212,566
Product Margin	$            323,732	$       179,702	$         503,434
Units	$              60,200	$          12,800
Product Margin per unit	$                   5.38	$            14.04

2.

Activity	Cost	Cost Driver		Cost per Cost driver
Machining	$            199,906	152600	Machine hours	$                            1.31
Setups	$            125,560	292	Setups	$                        430.00
Product Sustaining	$            100,200	2	Products	$                  50,100.00
Total	$            425,666
	B300	T500	Total
Sales Revenue	$        1,204,000	$         512,000	$                1,716,000
Costs
Direct Material	$            401,000	$         162,300	$                    563,300
Direct Labor	$            120,100	$           42,600	$                    162,700
Advertising	$              53,000	$         106,000	$                    159,000
Overhead
Machining	$            118,555	$           81,351	$                    199,906
Setups	$              30,960	$           94,600	$                    125,560
Product Sustaining	$              50,100	$           50,100	$                    100,200
Total Cost	$            773,715	$         536,951	$                1,310,666
Product Margin	$            430,285	$         -24,951	$                    405,334
Units	$              60,200	$           12,800
Product Margin per unit	$                   7.15	$              -1.95

3.

	B300		T500		Total
Traditional Cost System
Direct Material	$            401,000	71.19%	$                    162,300	28.81%	$            563,300
Direct Labor	$            120,100	73.82%	$                      42,600	26.18%	$            162,700
Overhead	$            359,168	73.82%	$                    127,398	26.18%	$            486,566
Total Cost assigned to Products	$            880,268		$                    332,298		$        1,212,566
Selling and administrative expense					$            560,000
Total Cost					$        1,772,566
ABC
Direct Costs
Direct Material	$            401,000	71.19%	$                    162,300	28.81%	$            563,300
Direct Labor	$            120,100	73.82%	$                      42,600	26.18%	$            162,700
Advertising	$              53,000	33.33%	$                    106,000	66.67%	$            159,000
Indirect Costs
Machining	$            118,555	59.31%	$                      81,351	40.69%	$            199,906
Setups	$              30,960	24.66%	$                      94,600	75.34%	$            125,560
Product Sustaining	$              50,100	50.00%	$                      50,100	50.00%	$            100,200
Total Cost assigned to Products	$            773,715		$                    536,951		$        1,310,666
Costs not assigned to products
Selling and administrative expense					$            401,000
Other					$              60,900
Total Cost					$        1,772,566