Problem 7-16 Comparing Traditional and Activity-Based Product Margins [LO7-1, LO
ID: 2417591 • 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 Manufacturing Indc. Income Statement Sales Cost of goods sold $1,697,300 1,233,295 Gross margin Selling and administrative expenses 464,005 600,000 Net operating loss $ (135,995) Hi-Tek produced and sold 60,100 units of B300 at a price of $20 per unit and 12,700 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 Direct labor Manufacturing overhead $400,500 162,700 $ 563,200 163,500 506,595 $120,900 42,600 Cost of goods sold $ 1,233,295 The company has created an activity-based costing system to evaluate the profitability of its products. Hi Tek's ABC implementation team concluded that $53,000 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: Activity Manufacturing Overheacd Activity Cost Pool (and Activity Measure) B300 T500 TotalExplanation / Answer
1.PRODUCT MARGIN UNDER TRADITIONAL SYSTEM
2.PRODUCT MARGIN UNDER ACTIVITY-BASED COSTING SYSTEM:
B300 T500 TOTAL SALES 12,02,000 4,95,300 16,97,300 LESS:COST OF GOODS SOLD 8,96,001 3,37,294 12,33,295 PROFIT MARGIN 3,05,999 1,58,006 4,64,005