Question

Smoky Mountain Corporation makes two types of hiking boots-the Xtreme and the Pathfinder. Data concerning these two product lines appear below: Pathfinder Xtreme $ 115.00 $ 63.90 $ 12.00 $ 85.00 Selling price per unit Direct materials per unit Direct labor per unit 51.00 10.00 Direct labor-hours per unit 1.2 DLHS 1.0 DLHS Estimated annual production and sales 28,000 units 75,000 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 $2,063,400 Estimated total direct labor-hours 108,600 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): Estimated Overhead Cost Expected Activity Activities and Activity Measures Supporting direct labor (direct labor-hours) Batch setups (setups) Product sustaining (number of products) Xtreme Pathfinder Total 108,600 $ 673,320 520,000 790,000 80,080 $ 2,063,400 33,600 280 75,000 240 520 1 2 Other NA NA NA Total manufacturing overhead cost

Answer 1

Answers 1 Product Margin under Traditional Costing Xtreme Pathfinder Prodcut Margin 456400 3 75000 2 Product Margin under Activity Based costing Xtreme | Pathfinder Prodcut Margin 211480 700000 Total 831400 Total 911480

3. Quantitative Comparision of the Traditional and Activity Based Cost Assignments Quantitative comparsion of the Traditional Cost Xtreme Pathfinder Total Traditional Costing System Amount % Amount % Direct Material 1789200 31.9% 3825000 68.1% 5614200 DirectLabor 336000 30.9% 750000 69.1% 1086000 Manufacturing Overheads 638400 30.9% 1425000 69.1% 2063400 Cost Assigned to Prodcut 2763600 6000000 8763600 Quantitative Comparison of Acticity Based Cost Assignments Xtreme Pathfinder Total Activty Based Costing System Amount % Amount | % Direct Cost Direct Material 1789200 31.9% 3825000 68.1% 5614200 Direct Labor 336000 30.9% 750000 69.1% 1086000 Indirect Cost Supporing direct Labor 208320 30.9% 465000 69.1% 673320 Batch setup 280000 53.8% 240000 46.2% 520000 Prodcut Sustainind 395000 50.0% 395000 50.0% 790000 Total Cost Assigned to Products 3008520 5675000 8683520 Cost Not asigned to the Products Other 80080 Total Cost 8763600

Working Notes Xtreme Selling Price 115.00 Direct Material 63.90 Direct Labor 12.00 Dirct Labou hour Per unit 1.20 Estimated Production 28000 Pathfinder 85.00 51.00 10.00 1.00 75000 Estimated MOH Estimated Labor hours Predetermined Overhead Rate Total Direct Labor Hours =(Units * Direct Labor Hour) 2063400 108600 19.00 2063400/108600 Xtreme Pathfinder Total 33600 75000 108600 ו Traditional Costing System Xtreme Pathfinder Total sales 3220000 6375000 9595000 Direct Material 1789200 3825000 5614200 Direct Labor 336000 750000 1086000 Manufacturing Overheads 638400 1425000 2063400 Total Manufacturing Cost 2763600 6000000 8763600 Product Margin 456400 375000 831400

Determination of Activity Rate Activty Pool Estimated OH Supporing direct Labor 673320 Batch setup 520000 Prodcut Sustainind 790000 Base Activity Rate 108600 6.20 520 1000 2 395000 Activity Based Costing System Xtreme Pathfinder Total sales 3220000 6375000 9595000 Direct Material 1789200 3825000 5614200 Direct Labor 336000 750000 10860001 Supporing direct Labor 208320 465000 673320 Batch setup 280000 240000 520000 Prodcut Sustainind 395000 395000 790000 Total Cost 3008520 5675000 8683520 Product Margin 211480 700000 911480