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 $ 120.00 $ 63.50 $ 13.50 1.5 DLHS 24,000 units Pathfinder $ 92.00 $ 54.00 $ 9.00 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 $ 2,033, 000 107,000 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): Activities and Activity Measures Supporting direct labor (direct labor-hours) Batch setups (setups) Product sustaining (number of products) Other Total manufacturing overhead cost Estimated Expected Activity Overhead Cost Xtreme Pathfinder Total $ 663, 400 107,000 572,000 240 200 440 750,000 47,600 NA $ 2,033,000 NA NA Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system. 3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.

Answer 1

Traditional Method
	per unit	Xtreme	per unit	Pathfinder	Total
No. of units sold		24000		71000	95000
Sales	$120	$2,880,000	$92	$6,532,000	$9,412,000
Less: Direct Material	63.50	1524000	54.00	3834000	$5,358,000
Less: Direct Labor	13.50	324000	9.00	639000	$963,000
Less: Manufacturing Overhead	28.50	684000	19.00	1349000	$2,033,000
	(1.5*19)		(1*19)
Total	105.50	2532000	82.00	5822000
Product Margin	$14.50	$348,000	$10.00	$710,000	ans 1
Predetermined overhead rate	19
2033000/107000
	Xtreme	Pathfinder
ans 1 Product Margin	$14.50	$10.00
ans 2
Activity cost pool	Manu. Over	Total estimated driver	Activity rate	Xtreme	Cost allocated	Pathfinder	Cost allocated
Supporting direct labor	663400	107000	6.20	36000	223200	71000	440200
Batch setup	572000	440	1300	240	312000	200	260000
Product sustaining cost	750000	2	375000	1	375000	1	375000
				Total	910200		1075200
				No. of units	24000		71000
				Overhead cost per unit	37.93		15.14
Activity Based costing
	per unit	Xtreme	per unit	Pathfinder	Total
No. of units sold		24000		71000	95000
Sales	$120	$2,880,000	$92	$6,532,000	$9,412,000
Less: Direct Material	63.50	1524000	54.00	3834000	$5,358,000
Less: Direct Labor	13.50	324000	9.00	639000	$963,000
Less: Manufacturing Overhead	37.93	910320	15.14	1074940	$1,985,260
Total	114.93	2758320	78.14	5547940
Product Margin	$5.07	$121,680	$13.86	$984,060
	Xtreme	Pathfinder
Product Margin	$5.07	$13.86
Ans 3
	Xtreme		Pathfinder
Traditional method	Amt	% of Total amt	Amt	Total amt	Total
Direct Material	1524000	28.4	3834000	71.6	5358000
Direct Labor	324000	33.6	639000	66.4	963000
Manufacturing Overhead	684000	33.6	1349000	66.4	2033000
Total	2532000		5822000		8354000
ABC
Direct cost
Direct Material	1524000	28.4	3834000	71.6	5358000
Direct Labor	324000	33.6	639000	66.4	963000
Indirect cost
Supporting direct labor	223200	33.6	440200	66.4	663400
Batch setup	312000	54.5	260000	45.5	572000
Product sustaining cost	375000	50.0	375000	50.0	750000
Total cost assigned	2758200		5548200		8306400
Cost not assigned
Other					47600
Total cost					8354000
Calculation of % are
For example direct material
1524000/5358000*100	28.4	%
If any doubt please comment