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 $ 116.00 $ 64.00 $ 12.00 1.5 DLHS 29,000 units Pathfinder $ 80.00 $ 52.00 $ 8.00 1.0 DLHS 76,000 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 $ 1,912,000 119,500 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 $ 693,100 43,500 76,000 119,500 539,000 290 200 490 640,000 2 39,900 NA NA $ 1,912,000 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

Solution 1:

Overhead Allocation - Traditional Costing System
Particulars	Xtreme	Pathfinder	Total
Estimated annual Production (In units)	29000	76000
Direct Labour Hours Per unit	1.5	1
Total Direct Labour Hours	43500	76000	119500
Overhead Cost Allocation basis direct labour hours (Overhead / Total hours * Labor hours of model)	$696,000.00	$1,216,000.00	$1,912,000.00
Manufacturing overhead cost per unit (Allocated Overhead / Nos of units)	$24.00	$16.00

Computation of Product Margin - Traditional Costing System
Particulars	Xtreme	Pathfinder	Total
Selling price per unit	$116.00	$80.00
Direct material per unit	$64.00	$52.00
Direct labor per unit	$12.00	$8.00
Manufacturing overhead cost per unit	$24.00	$16.00
Product Margin per unit	$16.00	$4.00
Nos of units sold	29000	76000
Total Margin (Product margin per unit * Nos of unit sold)	$464,000.00	$304,000.00	$768,000.00

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	$693,100.00	Direct Labor hours	119500	$5.80	43500	$252,300.00	76000	$440,800.00
Batch Setups	$539,000.00	Setups	490	$1,100.00	290	$319,000.00	200	$220,000.00
Product sustaining	$640,000.00	Number of products	2	$320,000.00	1	$320,000.00	1	$320,000.00
Other	$39,900.00	No allocation
Total	$1,912,000.00					$891,300.00		$980,800.00
Nos of units						29000		76000
Allocated overhead per unit						$30.73		$12.91

Computation of Product Margin - Activity based Costing System
Particulars	Xtreme	Pathfinder	Total
Selling price per unit	$116.00	$80.00
Direct material per unit	$64.00	$52.00
Direct labor per unit	$12.00	$8.00
Allocated Manufacturing overhead cost per unit	$30.73	$12.91
Product Margin per unit	$9.27	$7.09
Nos of units sold	29000	76000
Total Margin (Product margin per unit * Nos of unit sold)	$268,700.00	$539,200.00	$807,900.00

Solution 3:

Quantity comparison of traditional cost assignment
Particulars	Xtreme		Pathfinder		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Material Cost	$1,856,000.00	32.0%	$3,952,000.00	68.0%	$5,808,000.00
Direct Labor Cost	$348,000.00	36.4%	$608,000.00	63.6%	$956,000.00
Manufacturing Overhead cost	$696,000.00	36.4%	$1,216,000.00	63.6%	$1,912,000.00
Total Cost assigned to Product	$2,900,000.00		$5,776,000.00		$8,676,000.00

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	$1,856,000.00	32.0%	$3,952,000.00	68.0%	$5,808,000.00
Direct Labor Cost	$348,000.00	36.4%	$608,000.00	63.6%	$956,000.00
Indirect Cost:
Supporting direct labor cost	$252,300.00	36.4%	$440,800.00	63.6%	$693,100.00
Batch Setups	$319,000.00	59.2%	$220,000.00	40.8%	$539,000.00
Product sustaining	$320,000.00	50.0%	$320,000.00	50.0%	$640,000.00
Total Cost Assigned to Products	$3,095,300.00		$5,540,800.00		$8,636,100.00
Cost not assigned to products:
Others					$39,900.00
Total Cost					$8,676,000.00