Problem 7-16 Comparing Traditional and Activity-Based Product Margins [LO7-1, LO
ID: 2416157 • 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 below:
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 $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:
The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $52,000 and $106,000 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:
Activity
Compute the product margins for the B300 and T500 under the company’s traditional costing system. (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole dollars.)
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.)
Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answer to 1 decimal place. (i.e. .1234 should be entered as 12.3) and other answers to nearest whole dollar amounts.)
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:
Explanation / Answer
Traditional costing system:
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allocation of manufacturing overheasd: according to labour hours
B300:(121000/163800)*490078=$362,023
T500:(42800/163800)*490078=$128,055
1) Product margin for B300: (60400*20)-(400900+121000+362023)=$324,077
Producrt margin for T500:(12500*40)-(162200+42800+128055)=$166,945
Activity based costing system:
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B300:
Setups:(71/291)*122220=29,820
Product sustaining:(1/2)*101000=50500
T500:
Setups:(220/291)*122220=92400
Product sustaining:(1/2)*101000=50500
1) Product margin for B300:(60400*20)-(400900+121000+90900+29820+50500)=$565,380
Producrt margin for T500:(12500*40)-(162200+42800+92400+50500)=$152100
Here The other category of overhead cost is not distributed as there no activity linked to it