Problem 7-16 Comparing Traditional and Activity-Based Product Margins [LO7-1, LO
ID: 2406416 • Letter: P
Question
Problem 7-16 Comparing Traditional and Activity-Based Product Margins [LO7-1, LO7-3, 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:
Hi-Tek produced and sold 60,200 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:
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 $107,000 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:
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.
Hi-Tek Manufacturing Inc.Income Statement Sales $ 1,691,500 Cost of goods sold 1,247,807 Gross margin 443,693 Selling and administrative expenses 560,000 Net operating loss $ (116,307 )
Explanation / Answer
B300 T500 Total Units 60200 12500 Sales Price 20.00 39.00 Direct Material 400700 162200 562900 Total Manufacturing OH 521007 Direct Labor 120900 43000 163900 Total Direct Labor Dollars 163900 Manufacturing OH 521007 Overhead Per Dollars 3.18 Cost of Goods Sold 1247807 1 B300 T500 Sales Price 20.00 39.00 Less: Direct Material 6.66 12.98 Less: Direct Labor 2.01 3.44 Less: Maufacturing OH 6.38 10.94 (DL Dollars* OHRate) Product Margin 4.95 11.65 16.60 2 B300 T500 Activity Pools Amt B300 T500 Total Per Driver Sales Price 20.00 39.00 Machining 209747 90100 63000 153100 1.37 Less: Direct Material 6.66 12.98 Setups 150360 78 280 358 420 Less: Direct Labor 2.01 3.44 Product Sustaining 100600 1 1 2 50,300 Less: Maufacturing OH 3.43 20.34 From Right Side Other 60300 NA NA NA Product Margin 7.91 2.25 Total M OH 521007 Allocation: B300 T500 Machining 123437 86310 (Activity Driver* Rate) Setups 32760 117600 (Activity Driver* Rate) Product Sustaining 50300 50300 (Activity Driver* Rate) Total M OH 206497 254210 Units 60200 12500 B300 T500 Manufacturing OH 3.43 20.34 60200 12500 3 B300 T500 Total Traditional Cost System Amount % Amount % Amount Direct Material 4,00,700 44.2% 1,62,200 47.4% 5,62,900 Direct Labor 1,20,900 13.3% 43,000 12.6% 1,63,900 Manufacturing OH 3,84,318 42.4% 1,36,689 40.0% 5,21,007 Total Cost assigned to products 9,05,918 100.0% 3,41,889 100.0% 12,47,807 Activity Based Costing Amount % Amount % Amount Direct Costs: Direct Material 4,00,700 55.0% 1,62,200 35.3% 5,62,900 Direct Labor 1,20,900 16.6% 43,000 9.4% 1,63,900 Indirect Costs: Machining 1,23,437 17.0% 86,310 18.8% 2,09,747 Setups 32,760 4.5% 1,17,600 25.6% 1,50,360 Product Sustaining 50,300 6.9% 50,300 10.9% 1,00,600 Total Cost assigned to products 7,28,097 100.0% 4,59,410 100.0% 11,87,507 Costs not assigned to products: Others 60300 Total Cost 12,47,807