Question

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 $395,000. 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.

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 $395,000. 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 Rate Activity Cost Pools Sales commissions Advertising-TV Advertising-Internet Catalogs Cost of catalog sales Credit and collection Cost Drivers Dollar sales Minutes Column inches Catalogs mailed Catalog orders Dollar sales $0.05 per dollar sales 5300 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 $936,000 290 2,100 59,800 9,250 936,000 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 LINK TO TEXT LINK TO TEXT LINK TO TEXT By what amount does the traditional product costing system undercost or overcost the "high-intensity product line? LINK TO TEXT LINK TO TENT LINK TO TEXT

Answer 1

	Overhead Rate	Qty of Cost Driver	Allocated Overhead
Sales Commission	0.05	936000	46800
Advertising -TV	300	290	87000
Advertising -Internet	10	2100	21000
Catalogs	2.5	59800	149500
Cost of Catalog Sales	1	9250	9250
Credit and Collection	0.03	93600	2808
Total alloctaed Selling Cost			316358

Direct Material Cost ($)	395000
70% of Material Cost	276500

	Traditional Product Costing	Activity Based Costing
Selling Cost Assigned	276500	316358

The traditional product costing undercost the product the 'high intensity' product line by $ 39,858 (316358 - 276500)