Question

Problem 7-16 Comparing Traditional and Activity-Based Product Margins (L07-1, LO7-3, L07-4, L07-5) 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: Hi-Tel Manufacturint Inc. Income Statement Cost of goods sold GIOS margin Selling and administrative expenses Net operating loss $ 1,695,500 1,214,024 181,476 580,000 Hi-Tek produced and sold 60,400 units of B300 at a price of $20 per unit and 12,500 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! Direct materials Direct labar Manufacturing overhead Cost of goods sold 8300T500Total $ 400, 400 $ 162,500 S 562,900 $ 120, BOD $ 42,000 162,800 488,324 $1,214,024 The company has created an activity-based costing system to evaluate the profitability of its products Hi-Tek's ABC implementation team concluded that $54,000 and 5105,000 of the company's advertising expenses could be directly traced to 8300 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: Ratsity B300 T300 Total 90, 200 62,200 152,400 Activity Cast Pool and Activity Measure) Machining machine-hours) Betups (aerup hours Produco-sustaining number of products) Other organization-ustaining costa) Total manufacturing overhead cost Manufacturing Overhead $ 199, 644 227, 680 100, 200 60, 800 See, 324 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

Thanks for your help and time!!!

Answer 1

Calculation of product margin under traditional system
	B300	T500
Sales Revenue	1,208,000.00	487,500.00
Direct Material	400,400.00	162,500.00
Direct Labor	120,800.00	42,000.00
Overhead	362,343.61	125,980.39
Product Margin	324,456.39	157,019.61
Under ABC
	B300	T500
Sales Revenue	1,208,000.00	487,500.00
Direct Material	400,400.00	162,500.00
Direct Labor	120,800.00	42,000.00
Overhead
Machining	118162	81482
Setups	31080	96600
Product Sustaining	50100	50100
Product Margin	487,458.00	54,818.00
	B300	T500
Traditional costing	324,456.39	157,019.61
ABC Costing	487,458.00	54,818.00
Difference	-163,001.61	102,201.61

2 B300 T500 3 Sales Revenue =60400*20 =12500*39 4 Direct Material 400400 162500 5 Direct Labor 120800 42000 6 Overhead =488324*B5/SUM(B5:C5)=488324*C5/SUM(B5:05) 7 Product Margin =B3-SUM(B4:B6) =C3-SUM(C4:06) 8 9 Under ABC B300 T500 11 Sales Revenue =B3 =C3 12 Direct Material =B4 13 Direct Labor =B5 =C5 14 Overhead 15 Machining =199644*90200/152400 1=199644*62200/152400 16 Setups =127680*74/304 =127680*230/304 17 Product Sustaining =100200*1/2 =100200*1/2 18 Product Margin =B11-SUM(B12:317) =C11-SUM(C12:C17) 10 =C4 19 20 B300 21 Traditional costing =B7 22 ABC Costing =B18 23 Difference =B21-B22 T500 =C7 =C18 =C21-C22