Reference no: EM132478624

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                                                     $1,718,000

Cost of goods sold                                     1,227,421

Gross margin                                                490,579

Selling and administrative expenses                 640,000

Net operating loss                                      $(149,421)

Hi-Tek produced and sold 60,300 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:

                                       B300                         T500                               Total

Direct materials          $400,600                $162,200                 $562,800

Direct labor                 $120,700               $42,100                   162,800

Manufacturing overhead                                                          501,821

Cost of goods sold                                                               $1,227,421

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek's ABC implementation team concluded that $50,000 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:

Manufacturing Overhead Activity

Activity Cost Pool (and Activity Measure)            B300                T500                  Total

Machining (machine-hours) $210,021                    90,400           62,900             153,300

Setups (setup hours) 129,600                               74                250                   324

Product-sustaining (number of products)         101,400 1                1                      2

Other (organization-sustaining costs) 60,800            NA               NA                          NA

Total manufacturing overhead cost                                                                      $501,821

Question 1. Compute the product margins for the B300 and T500 under the company's traditional costing system.

Question 2. Compute the product margins for B300 and T500 under the activity-based costing system.

Question 3 display a quantitative comparison of the traditional and activity-based cost assignments.