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Critically discuss the idea that ABC is a more accurate costingapproach than traditional full (absorption) costing. Present indetail the differences between ABC and traditional full(absorption) costing, and the main advantages and limitations ofABC implementation.

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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 $ 1,780,400 Cost of goods sold 1,234,191 Gross margin 546,209 Selling and administrative expenses 560,000 Net operating loss $ (13,791) Hi-Tek produced and sold 60,400 units of B300 at a price of $21 per unit and 12,800 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 $ 400,400 $ 162,400 $ 562,800 Direct labor $ 120,600 $ 42,800 163,400 Manufacturing overhead 507,991 Cost of goods sold $ 1,234,191 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 $104,000 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 Activity Activity Cost Pool (and Activity Measure) Overhead B300 T500 Total Machining (machine-hours) $ 203,091 90,500 62,200 152,700 Setups (setup hours) 143,500 70 280 350 Product-sustaining (number of products) 100,600 1 1 2 Other (organization-sustaining costs) 60,800 NA NA NA Total manufacturing overhead cost $ 507,991 1. Compute the product margins for the B300 and T500 under the company’s traditional costing system. 1b. Compute the product margins for the B300 and T500 under the company’s traditional costing system. 1c. 3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.

Hi-Tek Manufacturing, Inc., makes two types of industrialcomponent parts—the B300 and the T500. An absorption costing incomestatement for the most recent period is shown: Hi-Tek ManufacturingInc. Income Statement Sales $ 1,710,000 Cost of goods sold1,235,260 Gross margin 474,740 Selling and administrative expenses620,000 Net operating loss $ (145,260 ) Hi-Tek produced and sold60,100 units of B300 at a price of $20 per unit and 12,700 units ofT500 at a price of $40 per unit. The company’s traditional costsystem allocates manufacturing overhead to products using aplantwide overhead rate and direct labor dollars as the allocationbase. Additional information relating to the company’s two productlines is shown below: B300 T500 Total Direct materials $ 400,500 $163,000 $ 563,500 Direct labor $ 120,300 $ 42,600 162,900Manufacturing overhead 508,860 Cost of goods sold $ 1,235,260 Thecompany has created an activity-based costing system to evaluatethe profitability of its products. Hi-Tek’s ABC implementation teamconcluded that $55,000 and $105,000 of the company’s advertisingexpenses could be directly traced to B300 and T500, respectively.The remainder of the selling and administrative expenses wasorganization-sustaining in nature. The ABC team also distributedthe company’s manufacturing overhead to four activities as shownbelow: Manufacturing Overhead Activity Activity Cost Pool (andActivity Measure) B300 T500 Total Machining (machine-hours) $198,770 90,800 62,100 152,900 Setups (setup hours) 147,490 73 270343 Product-sustaining (number of products) 101,600 1 1 2 Other(organization-sustaining costs) 61,000 NA NA NA Total manufacturingoverhead cost $ 508,860 Required: 1. Compute the product marginsfor the B300 and T500 under the company’s traditional costingsystem. 2. Compute the product margins for B300 and T500 under theactivity-based costing system. 3. Prepare a quantitative comparisonof the traditional and activity-based cost assignments.

PROBLEM 7-16 Comparing Traditional and Activity-Based Product Margins [LO7-1, L07-3, L07-4, 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 below: Hi-Tek Manufacturing Inc. Income Statement Sales ............. Cost of goods sold .... Gross margin .......... Selling and administrative expenses ...... Net operating loss ..... $2,100,000 1,600,000 500,000 550,000 $ (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 plantwide overhead rate and direct labor dollars as the allocation base. Addi- tional information relating to the company's two product lines is shown below: B300T500 Total $436,300 $200,000 $251,700 $104,000 Direct materials ........ Direct labor .............. Manufacturing overhead .... Cost of goods sold ........ $ 688,000 304,000 608,000 $1,600,000 The company has created an activity-based costing system to evaluate the profitability of its prod- ucts. 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: Activity Manufacturing Overhead B300T500 Total Activity Cost Pool (and Activity Measure) Machining (machine-hours) ...... Setups (setup hours) ... Product-sustaining (number of products) .... Other (organization-sustaining costs) .... Total manufacturing overhead cost ....... 62,500 152,500 3003 75 $213,500 157,500 120,000 117,000 $608,000 90,000 75 1 NA NA NA Required: 1. Using Exhibit 7-13 as a guide, compute the product margins for the 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 cost assign- ments differ.

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