Managerial Accounting: P7-16 Hi Tek Manufacturing Inc. makes two types of industrial component

Managerial Accounting 
Problem 7-16 Comparing traditional and activity based product margin 
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 Income Statement 
Sales 2,100,000 
Cost of Goods Sold 1,600,000 
Gross Margin 500,000 
Selling and admin expenses 550,000 
Net operating Income (50,000) 
Hi Tek produced and sold 70,000 units of B300 at a price of $20 per unit and 17,500 units of T500 at a price of $40 per unit. The company's traditional cost system allocates manufacturing overhead to products using a plant wide 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 436,300 251,700 688,000 
Direct Labor 200,000 104,000 304,000 
Manufacturing overhead 608,000 
COGS 1,600,000 
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 $100,000 of the company's advertising expenses could be directly traced to B300 and T500 respectively. The remainder of the selling and admin expenses was organization sustaining in nature. The ABC team also distributed the manufacturing overhead to four activities as shown below: 
Activity Cost pool (and activity measure) Manufacturing Overhead B300 T500 Total 
Machining (machine hours) 213,500 90,000 62,500 152,500 
Setups (setup hours) 157,500 75 300 375 
Product Sustaining (number of products) 120,000 1 1 2 
Other (organizational sustaining costs) 117,000 NA NA NA 
Total manufacturing overhead cost 608,000 

Required (exhibits below) 
1. Using exhibit 7-13 as guide, compute the product margins for B300 and T500 under the company's traditional costing system. 
2. Using exhibit 7-11 as a guide, compute the product margins for B300 and T500 under the activity based costing system. 
3. Using exhibit 7-14 as a guide, prepare a quantitative comparison of the traditional and activity based cost assignments. Explain why the traditional and activity based differ.
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