How to calculate product margin using traditional costing system

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

$

1,704,000

Cost of goods sold

1,232,520

Gross margin

471,480

Selling and administrative expenses

560,000

Net operating loss

$

(88,520

)

Hi-Tek produced and sold 60,200 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:

B300

T500

Total

Direct materials

$

400,800

$

162,200

$

563,000

Direct labor

$

120,700

$

42,200

162,900

Manufacturing overhead

506,620

Cost of goods sold

$

1,232,520

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $55,000 and $107,000 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)

$

208,080

91,000

62,000

153,000

Setups (setup hours)

136,740

78

240

318

Product-sustaining (number of products)

101,400

1

1

2

Other (organization-sustaining costs)

60,400

NA

NA

NA

Total manufacturing overhead cost

$

506,620

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.

Complete this question by entering your answers in the tabs below.

· Required 1

· Required 2

· Required 3

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 answers to the nearest whole dollar amount.)

B300

T500

Total

Product margin

$0

Complete this question by entering your answers in the tabs below.

· Required 1

· Required 2

· Required 3

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.)

B300

T500

Total

Product margin

$0

Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answers to 1 decimal place and and other answers to the nearest whole dollar amounts.)

B300

T500

Total

% of

% of

Amount

Amount

Amount

Traditional Cost System

%

%

%

%

%

%

Total cost assigned to products

$0

$0

$0

Total cost

$0

B300

T500

Total

% of

% of

Amount

Total Amount

Amount

Total Amount

Amount

Activity-Based Costing System

Direct costs:

%

%

%

%

%

%

Indirect costs:

%

%

%

%

%

%

Total cost assigned to products

$0

$0

0

Costs not assigned to products:

Total cost

$0