Question

Smoky Mountain Corporation makes two types of hiking boots-the Xtreme and the Pathfinder. Data concerning these two product lines appear below: Selling price per unit Direct materials per unit Direct labor per unit Direct labor-hours per unit Estimated annual production and sales Xtreme $ 125.00 $ 64.20 $ 16.00 1.6 DLHS 25,000 units Pathfinder $ 91.00 $ 55.00 $ 10.00 1.0 DLHS 71,000 units The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below: Estimated total manufacturing overhead Estimated total direct labor-hours $ 2,331,000 111,000 DLHS Required: 1. Compute the product margins for the Xtreme and the Pathfinder products under the company's traditional costing system. 2. The company is considering replacing its traditional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools (the Other cost pool includes organization-sustaining costs and idle capacity costs):

Answer 1

Solution 1:

Predetermined overhead rate = $2331000/111000 = $21 per hour

0 Computation of Product Margin - Traditional Costing System Particulars Xtreme Pathfinder Total 9 10 $125.00 $64.20 $16.00 $91.00 $55.00 $10.00 11 Selling price per unit Direct material per unit Direct labor per unit Manufacturing overhead cost per unit (Direct labor hours per unit* $21) Product Margin per unit Nos of units sold Total Margin (Product margin per unit * Nos of unit sold) $33.60 $11.20 25000 $21.00 $5.00 71000 14 $280,000 $355,000 $635,000 16 17 18 19 20 21 22 23 24 26 27 37 38 39 40 41 et355 Sheet303 (2) ) Sheet357 Sheet26 (5) Sheet15 (3)

Solution 2:

| AB AC Determination of activity rate for each activity & allocation of overhead Xtreme Pathfinder Activity Estimated Overhead Cost Activity Base Usage of Activity Base Activity Rate Supporting direct labor cost Batch Setups $888,000.00 Direct Labor hours $583,000.00 Setups 111000 530 Usage Allocated Costs Usage Allocated Costs $8.00 40000 $320,000.00 71000 $568,000.00 $1,100.00 310 $341,000.00 220 $242,000.00 $390,000.00 1 $390,000.00 1 $390,000.00 Product sustaining Other Total $780,000.00 Number of products $80,000.00 No allocation $2,331,000.00 $1,051,000.00 $1,200,000.00 Nos of units Allocated overhead per unit 25000 $42.04 71000 $16.90 Computation of Product Margin - Activity based Costing System Total Particulars Selling price per unit Direct material per unit Direct labor per unit Allocated Manufacturing overhead cost per Product Margin per unit Nos of units sold Total Margin (Product margin per unit * Nos of unit sold) Xtreme $125.00 $64.20 $16.00 $42.04 $2.76 25000 Pathfinder $91.00 $55.00 $10.00 $16.90 $9.10 71000 $69,000 $646,000 $715,000 et355 Sheet303 (2) ) Sheet357 Sheet26 (5) Sheet15 (3) Sheet359 Sheet329 Sheet347

Solution 3:

AD AF AGAH A AR Quantity comparison of traditional cost assignment Xtreme Pathfinder Total Particulars Direct Material Cost Direct Labor Cost Amount $1,605,000.00 $400,000.00 % of total Amount 29.13% 36.04% Amount $3,905,000.00 $710,000.00 % of total Amount 70.87% 63.96% Amount $5,510,000.00 $1,110,000.00 36.04% 63.96% Manufacturing Overhead cost Total Cost assigned to Product $840,000.00 $2,845,000.00 $1,491,000.00 $6,106,000.00 $2,331,000.00 $8,951,000.00 Quantity comparison of Activity Based cost assignment Xtreme Pathfinder Amount % of total Amount Amount % of total Amount Particulars Total Amount Direct Cost: Direct Material Cost Direct Labor Cost $1,605,000.00 $400,000.00 29.13% 36.04% $3,905,000.00 $710,000.00 70.87% 63.96% $5,510,000.00 $1,110,000.00 Indirect Cost: Supporting direct labor cost Batch Setups Product sustaining $320,000.00 $341,000.00 $390,000.00 36.04% 58.49% 50.00% $568,000.00 $242,000.00 $390,000.00 63.96% 41.51% 50.00% $888,000.00 $583,000.00 $780,000.00 $3,056,000.00 $5,815,000.00 $8,871,000.00 Total Cost Assigned to Products Cost not assigned to products: Others $80,000.00 $8,951,000.00 Total Cost Datens et355 Sheet303 (2) pense no sean someo Canto ) Sheet357 Sheet26 (5) Sheet15 (3)

0 Computation of Product Margin - Traditional Costing System Particulars Xtreme Pathfinder Total 9 10 $125.00 $64.20 $16.00 $91.00 $55.00 $10.00 11 Selling price per unit Direct material per unit Direct labor per unit Manufacturing overhead cost per unit (Direct labor hours per unit* $21) Product Margin per unit Nos of units sold Total Margin (Product margin per unit * Nos of unit sold) $33.60 $11.20 25000 $21.00 $5.00 71000 14 $280,000 $355,000 $635,000 16 17 18 19 20 21 22 23 24 26 27 37 38 39 40 41 et355 Sheet303 (2) ) Sheet357 Sheet26 (5) Sheet15 (3)

| AB AC Determination of activity rate for each activity & allocation of overhead Xtreme Pathfinder Activity Estimated Overhead Cost Activity Base Usage of Activity Base Activity Rate Supporting direct labor cost Batch Setups $888,000.00 Direct Labor hours $583,000.00 Setups 111000 530 Usage Allocated Costs Usage Allocated Costs $8.00 40000 $320,000.00 71000 $568,000.00 $1,100.00 310 $341,000.00 220 $242,000.00 $390,000.00 1 $390,000.00 1 $390,000.00 Product sustaining Other Total $780,000.00 Number of products $80,000.00 No allocation $2,331,000.00 $1,051,000.00 $1,200,000.00 Nos of units Allocated overhead per unit 25000 $42.04 71000 $16.90 Computation of Product Margin - Activity based Costing System Total Particulars Selling price per unit Direct material per unit Direct labor per unit Allocated Manufacturing overhead cost per Product Margin per unit Nos of units sold Total Margin (Product margin per unit * Nos of unit sold) Xtreme $125.00 $64.20 $16.00 $42.04 $2.76 25000 Pathfinder $91.00 $55.00 $10.00 $16.90 $9.10 71000 $69,000 $646,000 $715,000 et355 Sheet303 (2) ) Sheet357 Sheet26 (5) Sheet15 (3) Sheet359 Sheet329 Sheet347

AD AF AGAH A AR Quantity comparison of traditional cost assignment Xtreme Pathfinder Total Particulars Direct Material Cost Direct Labor Cost Amount $1,605,000.00 $400,000.00 % of total Amount 29.13% 36.04% Amount $3,905,000.00 $710,000.00 % of total Amount 70.87% 63.96% Amount $5,510,000.00 $1,110,000.00 36.04% 63.96% Manufacturing Overhead cost Total Cost assigned to Product $840,000.00 $2,845,000.00 $1,491,000.00 $6,106,000.00 $2,331,000.00 $8,951,000.00 Quantity comparison of Activity Based cost assignment Xtreme Pathfinder Amount % of total Amount Amount % of total Amount Particulars Total Amount Direct Cost: Direct Material Cost Direct Labor Cost $1,605,000.00 $400,000.00 29.13% 36.04% $3,905,000.00 $710,000.00 70.87% 63.96% $5,510,000.00 $1,110,000.00 Indirect Cost: Supporting direct labor cost Batch Setups Product sustaining $320,000.00 $341,000.00 $390,000.00 36.04% 58.49% 50.00% $568,000.00 $242,000.00 $390,000.00 63.96% 41.51% 50.00% $888,000.00 $583,000.00 $780,000.00 $3,056,000.00 $5,815,000.00 $8,871,000.00 Total Cost Assigned to Products Cost not assigned to products: Others $80,000.00 $8,951,000.00 Total Cost Datens et355 Sheet303 (2) pense no sean someo Canto ) Sheet357 Sheet26 (5) Sheet15 (3)