HiTek Manufacturing, Incorporated, makes two industrial component partsB and T An absorption costing income statement for the most recent period is shown below:
HiTek Manufacturing, Incorporated
Income Statement
Sales $
Cost of goods sold
Gross margin
Selling and administrative expenses
Net operating loss $
HiTek produced and sold units of B at a price of $ per unit and units of T at a price of $ per unit. The companys 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 companys two product lines is shown below:
B T Total
Direct materials $ $ $
Direct labor $ $
Manufacturing overhead
Cost of goods sold $
The company created an activitybased costing system to evaluate the profitability of its products. HiTeks ABC implementation team concluded that $ and $ of the companys advertising expenses could be directly traced to B and T respectively. The remainder of the selling and administrative expenses was organizationsustaining in nature. The ABC team also distributed the companys manufacturing overhead to four activities as shown below:
Activity Cost Pool and Activity Measure Manufacturing Overhead Activity
B T Total
Machining machinehours $
Setups setup hours
Productsustaining number of products
Other organizationsustaining costs NA NA NA
Total manufacturing overhead cost $
Required:
Compute the product margins for B and T under the companys traditional costing system.
Compute the product margins for B and T under the activitybased costing system.
Prepare a quantitative comparison of the traditional and activitybased cost assignments.
