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   $   121.00      $   85.00     
Direct materials per unit   $   64.90      $   51.00     
Direct labor per unit   $   11.20      $   8.00     
Direct labor-hours per unit      1.4   DLHs      1.0   DLHs
Estimated annual production and sales      27,000   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   $   2,156,000     
Estimated total direct labor-hours      107,800   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)   $   700,700      37,800   70,000   107,800
Batch setups (setups)      737,000      380   290   670
Product sustaining (number of products)      640,000      1   1   2
Other      78,300      NA   NA   NA
Total manufacturing overhead cost   $   2,156,000              

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.

Answer 1

Answers 1 Product Margin under Traditional Costing Pathfinder Total Xtreme Prodcut Margin 2 Product Margin under Activity Based costing 456300 420000 876300 Pathfinder Xtreme Total Prodcut Margin 954600 228600 726000

3. Quantitative Comparision of the Traditional and Activity Based Cost Assignments Quantitative comparsion of the Traditional Cost Total Pathfinder Xtreme Traditional Costing System Direct Material Direc tLabor Manufacturing Overheads Cost Assigned to Prodcut Amount Amount 67.1% 5322300 1752300 3570000 32.9% 302400 35.1% 560000 64.9% 862400 64.9% 2156000 8340700 756000 35.1% 1400000 5530000 2810700 Quantitative Comparison of Acticity Based Cost Assignments Total Pathfinder Xtreme Activty Based Costing System Direct Cost Direct Material Direct Labor Indirect Cost Supporing direct Labor Batch setup Prodcut Sustainind Total Cost Assigned to Products Cost Not asigned to the Products Other Amount % Amount 67.1% 5322300 32.9% 3570000 1752300 35.1% 560000 64.9% 302400 862400 245700 35.1% 455000 64.9% 700700 56.7% 43.3% 418000 319000 737000 50.0% 50.0% 320000 320000 640000 5224000 3038400 8262400 78300 Total Cost 8340700

Working Notes Pathfinder Xtreme Selling Price Direct Material Direct Labor 85.00 121.00 51.00 64.90 8.00 11.20 Dirct Labou hour Per unit 1.40 1.00 Estimated Production 70000 27000 Estimated MOH 2156000 Estimated Labor hours 107800 20.00 2156000/107800 Predetermined Overhead Rate Pathfinder Total Xtreme Total Direct Labor Hours (Units Direct Labor Hour) 37800 70000 107800 Traditional Costing System Total Pathfinder Xtreme sales Direct Material Direct Labor Manufacturing Overheads Total Manufacturing Cost Product Margin 5950000 3267000 9217000 1752300 3570000 5322300 560000 302400 862400 2156000 756000 1400000 5530000 2810700 8340700 456300 420000 876300

Determination of Activity Rate Activty Pool Supporing direct Labor Batch setup Estimated OH Base Activity Rate 6.50 700700 107800 1100 737000 670 Prodcut Sustainind 640000 2 320000 Activity Based Costing System Total Pathfinder Xtreme sales 3267000 5950000 9217000 Direct Material Direct Labor Supporing direct Labor Batch setup Prodcut Sustainind Total Cost Product Margin 1752300 3570000 5322300 560000 862400 302400 245700 455000 700700 319000 737000 418000 320000 320000 640000 5224000 3038400 8262400 954600 228600 726000