Question

Smoky Mountain Corporation makes two types of hiking boots—the Xtreme and the Pathfinder. Data concerning these two product lines appear below:

	Xtreme			Pathfinder
Selling price per unit	$	120.00		$	90.00
Direct materials per unit	$	64.10		$	53.00
Direct labor per unit	$	13.50		$	9.00
Direct labor-hours per unit		1.5	DLHs		1.0	DLHs
Estimated annual production and sales		30,000	units		70,000	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	$	2,300,000
Estimated total direct labor-hours		115,000	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):

	Estimated Overhead Cost			Expected Activity
Activities and Activity Measures				Xtreme	Pathfinder	Total
Supporting direct labor (direct labor-hours)	$	977,500		45,000	70,000	115,000
Batch setups (setups)		612,000		300	210	510
Product sustaining (number of products)		700,000		1	1	2
Other		10,500		NA	NA	NA
Total manufacturing overhead cost	$	2,300,000

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.

Compute the product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system. (Round your intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)

	Xtreme Pathfinder Total Product margin

Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system. (Round your intermediate calculations to 2 decimal places.)

	Xtreme Pathfinder Total Product margin

Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places.)

	Xtreme Pathfinder Total % of % of Amount Total Amount Amount Total Amount Amount Traditional Cost System % % % % % % Total cost assigned to products Xtreme Pathfinder Total % of % of Amount Total Amount Amount Total Amount Amount Activity-Based Costing System Direct costs: % % % % Indirect costs: % % % % % % Total cost assigned to products Costs not assigned to products: Total cost

Answer 1

Solution 1:

Overhead Allocation - Traditional Costing System
Particulars	Xtreme	Pathfinder	Total
Estimated annual Production (In units)	30000	70000
Direct Labour Hours Per unit	1.5	1
Total Direct Labour Hours	45000	70000	115000
Overhead Cost Allocation basis direct labour hours (Overhead / Total hours * Labor hours of model)	$900,000.00	$1,400,000.00	$2,300,000.00
Manufacturing overhead cost per unit (Allocated Overhead / Nos of units)	$30.00	$20.00

Computation of Product Margin - Traditional Costing System
Particulars	Xtreme	Pathfinder	Total
Selling price per unit	$120.00	$90.00
Direct material per unit	$64.10	$53.00
Direct labor per unit	$13.50	$9.00
Manufacturing overhead cost per unit	$30.00	$20.00
Product Margin per unit	$12.40	$8.00
Nos of units sold	30000	70000
Total Margin (Product margin per unit * Nos of unit sold)	$372,000.00	$560,000.00	$932,000.00

Solution 2:

Determination of activity rate for each activity & allocation of overhead
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Xtreme		Pathfinder
					Usage	Allocated Costs	Usage	Allocated Costs
Supporting direct labor cost	$977,500.00	Direct Labor hours	115000	$8.50	45000	$382,500.00	70000	$595,000.00
Batch Setups	$612,000.00	Setups	510	$1,200.00	300	$360,000.00	210	$252,000.00
Product sustaining	$700,000.00	Number of products	2	$350,000.00	1	$350,000.00	1	$350,000.00
Other	$10,500.00	No allocation
Total	$2,300,000.00					$1,092,500.00		$1,197,000.00
Nos of units						30000		70000
Allocated overhead per unit						$36.42		$17.10

Computation of Product Margin - Activity based Costing System
Particulars	Xtreme	Pathfinder	Total
Selling price per unit	$120.00	$90.00
Direct material per unit	$64.10	$53.00
Direct labor per unit	$13.50	$9.00
Allocated Manufacturing overhead cost per unit	$36.42	$17.10
Product Margin per unit	$5.98	$10.90
Nos of units sold	30000	70000
Total Margin (Product margin per unit * Nos of unit sold)	$179,500.00	$763,000.00	$942,500.00

Solution 3:

Quantity comparison of traditional cost assignment
Particulars	Xtreme		Pathfinder		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Material Cost	$1,923,000.00	34.1%	$3,710,000.00	65.9%	$5,633,000.00
Direct Labor Cost	$405,000.00	39.1%	$630,000.00	60.9%	$1,035,000.00
Manufacturing Overhead cost	$900,000.00	39.1%	$1,400,000.00	60.9%	$2,300,000.00
Total Cost assigned to Product	$3,228,000.00		$5,740,000.00		$8,968,000.00

Quantity comparison of Activity Based cost assignment
Particulars	Xtreme		Pathfinder		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Cost:
Direct Material Cost	$1,923,000.00	34.1%	$3,710,000.00	65.9%	$5,633,000.00
Direct Labor Cost	$405,000.00	39.1%	$630,000.00	60.9%	$1,035,000.00
Indirect Cost:
Supporting direct labor cost	$382,500.00	39.1%	$595,000.00	60.9%	$977,500.00
Batch Setups	$360,000.00	58.8%	$252,000.00	41.2%	$612,000.00
Product sustaining	$350,000.00	50.0%	$350,000.00	50.0%	$700,000.00
Total Cost Assigned to Products	$3,420,500.00		$5,537,000.00		$8,957,500.00
Cost not assigned to products:
Others					$10,500.00
Total Cost					$8,968,000.00