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 Statement
Sales $ 1,643,000
Cost of goods sold 1,230,620
Gross margin 412,380
Selling and administrative expenses 620,000
Net operating loss $ (207,620)
Hi-Tek produced and sold 60,200 units of B300 at a price of $19 per unit and 12,800 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 $ 400,600 $162,700 $ 563,300
Direct labor $ 120,700 $ 42,900 163,600
Manufacturing overhead 503,720
Cost of goods sold $ 1,230,620
The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $51,000 and $104,000 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:
Manufacturing Activity
Activity Cost Pool (and Activity Measure) Overhead B300 T500 Total
Machining (machine-hours) $ 211,140 90,300 62,700 153,000
Setups (setup hours) 130,380 78 240 318
Product-sustaining (number of products) 101,200 1 1 2
Other (organization-sustaining costs) 61,000 NA NA NA
Total manufacturing overhead cost $ 503,720 Required
1. Compute the product margins for the B300 and T500 under the company’s traditional costing system. (Do not round your overhead rate. Round your other intermediate and final answers to the nearest whole number.)
B300 T500 Total
Product margin
2. Compute the product margins for B300 and T500 under the activity-based costing system. (Negative product margins should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places.)
B300 T500 Total
Product margin
3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Do not round your overhead rate. Round your other intermediate calculations and final answers to the nearest whole number. Round your "Percentage" answer to 1 decimal place. (i. e. .1234 should be entered as 12.3))
B300 T500 Total
% of % of
Amount Total Amount Amount Total Amount Amount
Traditional Cost System
% %
% %
% %
Total cost assigned to products
Total cost
B300 T500 Total
% of % of
Amount Total Amount Amount Total Amount Amount
Activity-Based Costing System
Direct costs:
% %
% %
% %
Indirect costs:
% %
% %
% %
Total cost assigned to products
Costs not assigned to products:
Total cost