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 Inc.
Income Statement
Sales............................................ $2,100,000
Cost of goods sold............................. 1,600,000
Gross margin....................................... 500,000
Selling and administrative expenses ........... 550,000
Net operating loss................................ $ (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:

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 administrative expenses was organization-sustaining in nature.
The ABC team also distributed the company's manufacturing overhead to four activities as shown below:

Required:
1. Using Exhibit 6-13 as a guide, compute the product margins for the B300 and T500 under the company's traditional costing system.
Exhibit 6-13 Product Margins-Traditional Costing System

2. Using Exhibit 6-11 as a guide, compute the product margins for B300 and T500 under the activity-based costing system.
Exhibit 6-11: Product Margins-Activity-Based Costing

3. Using Exhibit 6-14 as a guide, prepare a quantitative comparison of the traditional and activity based cost assignments. Explain why the traditional and activity-based cost assignments differ?
Exhibit 6-14: A Comparison of Traditional and Activity-Based Cost Assignments

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B300 T500 Total Manufacturing overhead Cost of goods sold $200,000 $104,000 304,000 608,000 $1,600,000o Activity Manufacturing Overhead Activity Cost Pool (and Activity Measure) B300 T500 Total $213,500 90,000 62,500 152,500 375 2 NA 157,500 120,000 117,000 $608,000 75 300 Product-sustalning (number of products) Other (organization-sustalning costs). Total manufacturing overhead cost NA NA F G H 1 Product Margins-Traditional Cost System Custom Compass Housings 2 3 Sales 4 Cost of goods sold: 5 Direct materials 6 Direct labor 7 Manufacturing overhead 8 Product margin 9 Selling and administrative 10 Net operating income Standard Stanchions Total 2,660,000 540,000 3,200,000 69,500 87.500 S 905,500 s 975.000 351.250 263,750 875 0002044 250 873,750 :D: E 1 Product Margins-Activity-Based Costing Standard Stanchions Custom Compass Housings 540,000 2,660,000 3 Sales 4 Costs 5 Direct materials 6 Direct labor 7 Shipping 8 Customer orders (from Exhibit 6-9) 9 Product design (from Exhibit 6-9) 10 Order size (from Exhibit 6-9) 11 Total cost 2 Product margin 13 905,500 263,750 60,000 192,000 $ 69,500 87,500 5,000 128,000 252,000 1753 750 589.500 HMEExhibit 6-7 Exhibit 6-9Exhibit 6-10Exhibit 6-11 Exhibit 6-0 DEF Standard Stanchions Custom Compass Housings 2 Traditional Cost System 3 Direct matenals 4 Direct labor 5 Manufacturing overhead Amount %" Amount% Tota s 905,500 92.9% S 69.500 7.1% $975,000 263,750 75.1% 87,500 24.9% 351,250 875000 87.5% -125.000 12.5% 1.000.000 2,326,250 Total cost assigned to products T Selling and administrative 8 Total cost $2.044 250 0 Activity-Based Costing System 11 Direct costs 12 Drect materials 13 Direct labor 14 Shipping 15 Indirect costs: 16 Customer orders $ 905,500 263,750 60,000 92.9% 75.1% 92.3% S 69.500 87,500 5,000 24. 9% 7.7% 7.1% $975,000 351,250 65,000 192,000 60.0% 128,000 40.0% 0.0% 252,000 100.0% 12.6% 320,000 262,000 380000 2,343,250 17 Product design 18 Order sizo -332.500875% $1753 750 -47 500 19 Total cost assigned to products 21 Costs not assigned to products: 22 Customer relations 23 Other 367.500 24 Total cost 25 26 The percentages are rounded to the nearest tenth of a percent. 27 HFhit 6-1 it6-13Fxhiit 6-14 Fxhhit 6A-1Fhhit4