PROBLEM 7-16 Comparing Traditional and Activity-Based Product Margins LO7-1 LO7-

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PROBLEM 7-16 Comparing Traditional and Activity-Based Product Margins LO7-1 LO7-3LO7-4 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 Hi-Tek Manufacturing Inc. Income Statement Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating loss $2,100,000 1,600,000 500,000 550,000 $ (50,000) Hi-Tek produced and sold 70,000 units of B300 at a price of $20 per unit and 17,500 units of T500 at a price of $40 per unit. The company's traditional cost system allocates manufacturing overhcad to products using a plantwide overhcad 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 Direct labor Manufacturing overhead Cost of goods sold $436,300 $251,700 $ 688,000 $200,000 $104,000 304,000 608,000 $1,600,000 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tck's ABC implementation team concluded that S50,000 and $100,000 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: Activity Manufacturing Total $213,500 90,000 62,500 152,500 375 T500 Activity Cost Pool (and Activity Measure) hd B300 Machining (machine-hours) Setups (setup hours) Product-sustaining (number of products) 120,000 Other (organization-sustaining costs Total manufacturing overhead cost 157,500 75 300 NA NA NA 117,000 $608,000 Required: I. Using Exhibit 7-13 as a guide, compute the product margins for the B300 and T500 under the company's traditional costing system. 2. Using Exhibit 7-11 as a guide, compute the product margins for B300 and T500 under the activity-based costing system. 3. Using Exhibit 7-14 as a guide, prepare a quantitative comparison of the traditional and activity-based cost assignments. Explain why the traditional and activity-based cost assignments Page 350 differ

Explanation / Answer

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1 Product margin under traditional system is B300 T500 Total A No. of units 70,000 17,500 87,500 B Sale price per unit 20 40 C=A*B Sale Value 1,400,000 700,000 2,100,000 D Direct Material 436,300 251,700 688,000 E Direct Labor 200,000 104,000 304,000 F=D+E Total Direct Costs 636,300 355,700 992,000 G Manufacturing Overhead 400,000 208,000 608,000 H =F+G Total Product Cost 1,036,300 563,700 1,600,000 I=C-H Product Margin 363,700 136,300 500,000

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