Question

E17.10 Assign overhead using traditional costing and ABC. (LO 1, 2, 3), AP 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. Number of Cost Drivers Used Overhead Rate per Activity $900,000 Activity Cost Pools Cost Drivers Sales commissions Dollar sales Advertising-TV Minutes Advertising-Internet Column inches $0.05 per dollar sales $300 per minute $10 per column inch 250 2,000 Catalogs Catalogs mailed $2.50 per catalog Cost of catalog sales Catalog orders Credit and collection Dollar sales $1 per catalog order $0.03 per dollar sales 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-1) It is given that traditional product costing uses 70% of direct material cost as selling costs application rate. Therefore, high- intensity Direct material cost $400,000 Selling costs application rate 70% Selling costs allocated $280,000 [$400000 x 70%] a-2) Activity cost pools Coar driver Sales commissions Advertising-TV Advertising-Internet Catalogs Cost of catalogs sales Credit and collection Selling costs allocated Dollar sales Minutes Column inches Catalogs mailed Catalog ordered Dollar sales Drivers used $900,000 250 2,000 60,000 9,000 $900,000 Activity Rate $0.05 $300 $10 $2.50 $1 $0.03 Cost Assigned $45,000 ($900000 x $0.05] $75,000 (250 x $300] $20,000 [2000 x $10] $150,000 (60000 x $2.5] $9,000 (9000 x $1] $27,000 ($900000 x $0.03] $326,000 b) Selling costs allocated to high-intensity using traditional product costing $280,000 (Ref: Part-(a-1)] Selling costs allocated to high-intensity using activity based costing $326,000 (Ref: Part-(a-2)] Traditional costing undercost the 'high-intensity' product by $46,000 [Diff. between $280000 and $326000]