Problem 7-16 Comparing Traditional and Activity-Based Product Margins [LO7-1, LO
ID: 2552521 • 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 Manufacturing Inc. Income Statement Sales $ 1,712,000 Cost of goods sold 1,228,154 Gross margin 483,846 Selling and administrative expenses 650,000 Net operating loss $ (166,154 ) Hi-Tek produced and sold 60,200 units of B300 at a price of $20 per unit and 12,700 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 $ 400,800 $ 162,400 $ 563,200 Direct labor $ 120,300 $ 42,500 162,800 Manufacturing overhead 502,154 Cost of goods sold $ 1,228,154 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $59,000 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 below: Manufacturing Overhead Activity Activity Cost Pool (and Activity Measure) B300 T500 Total Machining (machine-hours) $ 204,554 90,800 63,000 153,800 Setups (setup hours) 135,200 78 260 338 Product-sustaining (number of products) 102,000 1 1 2 Other (organization-sustaining costs) 60,400 NA NA NA Total manufacturing overhead cost $ 502,154 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.
Explanation / Answer
1.
2.
Working:
3.
Income statement - Traditional Allocation B300 T500 Total Sales 1204000 508000 1712000 Cost of goods sold Direct Material 400800 162400 563200 Direct Labor 120300 42500 162800 Manufacturing Overhead 371063 131091 502154 Total cost of goods sold 892163 335991 1228154 Gross profit 311837 172009 483846 Selling and administrative expenses 650000 Net operating loss -166154 Product margins under traditional system 311837 172009 Total manufactuirng overhead 502154 Total Direct labor cost 162800 Predetermined overhead rate 308% (% of direct labor cost)