Question

sed IS USU S c. Write a memorandum to the president of Air United explaining the benefits of activity-based costing E17.10 (LO 1. 2. 3) Kragan Clothing Company manufactures its own designed and labeled athletic wear and sells its products through catalog sales and retail outlets. While Kragan has for years used activity-based costing in its manufacturing activities, it has always used traditional costing in assigning its selling costs to its product lines. Selling costs have traditionally been assigned to Kragan's product lines at a rate of 70% of direct materials costs. Its direct materials costs for the month of March for Kragan's "high-intensity line of athletic wear are $400,000. The company has decided to extend activity-based costing to its selling costs. Data relating to the high-intensity line of products for the month of March are as follows. Assign overhead using traditional costing and ABC Activity Cost Pools Sales commissions Advertising-TV Advertising ---Internet Catalogs Cost of catalog sales Credit and collection Cost Drivers Dollar sales Minutos Column inches Catalogs mailed Catalog orders Dollar sales Overhead Rate $0.05 per dollar sales $300 per minute $10 per column inch $2.50 per catalog $1 per catalog order $0.03 per dollar sales Number of Cost Drivers Used per Activity $900,000 250 2,000 60,000 9,000 900,000 Instructions a. Compute the selling costs to be assigned to the "high-intensity line of athletic wear for the month of March (1) using the traditional product costing system (direct materials cost is the cost driver), and (2) using activity-based costing. b. By what amount does the traditional product costing system undercost or overcost the "high-intensity product line relative to costing under ABC?

Answer 1

a)
i)
Statement of Cost Using Traditional Costing
Particulars	Amount in $
Sales Cost(400000*70%)	280000
Total Cost	280000
ii)
Statement of Cost Using ABC Costing
Particulars	No. of Activity	Overhead Rate	Total in $
Sales Commission	900000	0.05	45000
Advertising-Tv	250	300	75000
Advertising-Internet	2000	10	20000
Catalogs	60000	2.5	150000
Cost of Catalog Sales	9000	1	9000
Credit and Collection	900000	0.03	27000
	Total		326000
b)
Traditional Product Cost is Undercost by $46000 (326000-280000).