Question

Exercise 17-10 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 $401,000. 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 Overhead Number of Cost Drivers Used per Activity Activity Cost Pools Cost Drivers Rate Dollar sales $943,000 Sales commissions $0.05 per dollar sales Advertising-TV Minutes $300 per minute 250 Column inches Advertising-Internet $10 per column inchi 1,900 60,800 Catalogs Catalogs mailed $2.50 per catalog 8,500 Cost of catalog sales Catalog orders $1 per catalog order Dollar sales Credit and collection $0.03 per dollar sales 943,000 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 Traditional product costing Activity-based costing Selling cost to be assigned

Answer 1

	Traditional product costing	Activity based costing
Selling cost to be assigned	280700	329940
$ 49240 undercost	=329940-280700
Workings:
Traditional product costing
Direct materials cost	401000
X Rate	70%
Selling cost to be assigned	280700
Activity based costing:
Sales Commissions	47150	=943000*0.05
Advertising-TV	75000	=250*300
Advertising-Internet	19000	=1900*10
Catalogs	152000	=60800*2.50
Cost of catalog sales	8500	=8500*1
Credit and Collection	28290	=943000*0.03
Selling cost to be assigned	329940