Question

Problem 5-17 (Algo) Comparing Traditional and Activity-Based Product Margins [LO5-1, L05-3, LO5-4, LO5-5] 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 $ 121.00 $ 65.30 $ 13.50 1.5 DLHS 31,000 units $ $ $ Pathfinder 86.00 52.00 9.00 1.0 DLHS 65,000 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 2,230,000 111,500 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 Overhead Cost $ 724,750 975,000 470,000 60,250 $ 2,230,000 Expected Activity Xtreme Pathfinder Total 46,500 65,000 111,500 420 330 750 1 1 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. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 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 378,200 Pathfinder $ 325,000 Total 703,200 Product margin $ $ Required 1 Required 2 >

Answer 1

1. Product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system.
	Xtreme	Pathfinder	Total
Product margin       [Refer working note 1]	$378,200	$325,000	$703,200
2. Product margins for the Xtreme and the Pathfinder products under the company’s activity-based costing system.
	Xtreme	Pathfinder	Total
Product margin      [Refer working note 7]	$224,950	$538,500	$763,450

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3. Quantitative comparison of the traditional and activity-based cost assignments     [Refer working note 10]
	Xtreme		Pathfinder		Total
		% of		% of
	Amount	Total amount	Amount	Total amount	Amount
Traditional Cost System
Direct material	$2,024,300	37.5%	$3,380,000	62.5%	$5,404,300
Direct labor	$418,500	41.7%	$585,000	58.3%	$1,003,500
Manufacturing overhead	$930,000	41.7%	$1,300,000	58.3%	$2,230,000
Total costs assigned to products	$3,372,800		$5,265,000		$8,637,800
	Xtreme		Pathfinder		Total
		% of		% of
	Amount	Total amount	Amount	Total amount	Amount
Activity Based Costing System
Direct costs:
Direct material	$2,024,300	37.5%	$3,380,000	62.5%	$5,404,300
Direct labor	$418,500	41.7%	$585,000	58.3%	$1,003,500
Indirect costs:
Supporting direct labor         [Refer working note 8]	$302,250	41.7%	$422,500	58.3%	$724,750
Batch setups                          [Refer working note 8]	$546,000	56.0%	$429,000	44.0%	$975,000
Product sustaining                 [Refer working note 8]	$235,000	50.0%	$235,000	50.0%	$470,000
Total costs assigned to products	$3,526,050		$5,051,500		$8,577,550
Costs not assigned to products
Other					$60,250
Total cost					$8,637,800

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Working note 1 - Calculation of profit margin under the company’s traditional costing system
	Xtreme	Pathfinder
Sales revenue                                                                    [Refer working note 2]	$3,751,000	$5,590,000
Less: Total direct material cost                                       [Refer working note 3]	$2,024,300	$3,380,000
Less: Total direct labor cost                                            [Refer working note 4]	$418,500	$585,000
Less: Manufacturing overhead allocated or applied         [Refer working note 5]	$930,000	$1,300,000
Product margin	$378,200	$325,000

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Working note 2 - Calculation of total sales revenue
	Xtreme	Pathfinder
Selling price per unit                                  (a)	$121.00	$86.00
Number of units produced / Sold                (b)	31,000	65,000
Total sales revenue                                   (a x b)	$3,751,000	$5,590,000

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Working note 3 - Calculation of total direct material cost
	Xtreme	Pathfinder	Total
Direct material cost per unit              (a)	$65.30	$52.00
Number of units produced / Sold               (b)	31,000	65,000
Total direct material cost                 (a x b)	$2,024,300	$3,380,000	$5,404,300

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Working note 4 - Calculation of total direct labor cost
	Xtreme	Pathfinder
Direct labor cost per unit                      (b)	$13.50	$9.00
Number of units produced                      (b)	31,000	65,000
Total direct labor cost                    (a x b)	$418,500	$585,000

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Working note 5 - Calculation of overhead cost allocated to each product
	Xtreme	Pathfinder
Actual number of direct labor hours                               (a)	46,500	65,000
Predetermined overhead rate [refer working note 6]     (b)	$20	$20
Overhead assigned                                                        (a x b)	$930,000	$1,300,000

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Working note 6 - Calculation of predetermined overhead rate
Estimated total manufacturing overhead       (a)	$2,230,000
Estimated total direct labor hours                (b)	111,500
Predetermined overhead rate                     (a / b)	$20.00	per direct labor hour

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Working note 7 - Calculation of profit margin under the company’s activity based costing system.
	Xtreme	Pathfinder
Sales revenue                                                                    [Refer working note 2]	$3,751,000	$5,590,000
Less: Total direct material cost                                       [Refer working note 3]	$2,024,300	$3,380,000
Less: Total direct labor cost                                            [Refer working note 4]	$418,500	$585,000
Less: Manufacturing overhead allocated or applied         [Refer working note 8]	$1,083,250	$1,086,500
Product margin	$224,950	$538,500

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Working note 8 - Allocation of Estimated Overhead to both the products using activity rates:
Activities and Activity Measures	Activity Rate [Refer working note 9]		Xtreme			Pathfinder
			Total expected activity		Allocation	Total expected activity		Allocation
	(a)		(b)		(a x b)	(c)		(a x c)
Supporting direct labor	$6.50	per direct labor hour	46,500	direct labor-hours	$302,250	65,000	direct labor-hours	$422,500
Batch setups	$1,300.00	per setup	420	setups	$546,000	330	setups	$429,000
Product sustaining	$235,000.00	per product	1		$235,000	1	number of products	$235,000
Total overhead allocated					$1,083,250			$1,086,500

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Working note 9 - Calculation of Activity rate
Activities and Activity Measures	Estimated overhead cost	Total expected activity		Activity rate
	(a)	(b)		( a / b)
Supporting direct labor	$724,750	111,500	direct labor-hours	$6.50	per direct labor hour
Batch setups	$975,000	750	setups	$1,300.00	per setup
Product sustaining	$470,000	2	Products	$235,000.00	per product

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Working note 10 - Computation of % of total amount
Traditional Cost System:
	Total amount	Xtreme		Pathfinder
		Amount	% of Total amount	Amount	% of Total amount
	(a)	(b)	(b/a) x 100	(c)	(c/a) x 100
Direct material	$5,404,300	$2,024,300	37.5%	$3,380,000	62.5%
Direct labor	$1,003,500	$418,500	41.7%	$585,000	58.3%
Manufacturing overhead	$2,230,000	$930,000	41.7%	$1,300,000	58.3%
Activity Based Costing System:
	Total amount	Xtreme		Pathfinder
		Amount	% of Total amount	Amount	% of Total amount
	(a)	(b)	(b/a) x 100	(c)	(c/a) x 100
Direct costs:
Direct material	$5,404,300	$2,024,300	37.5%	$3,380,000	62.5%
Direct labor	$1,003,500	$418,500	41.7%	$585,000	58.3%
Indirect costs:
Supporting direct labor         [Refer working note 8]	$724,750	$302,250	41.7%	$422,500	58.3%
Batch setups                          [Refer working note 8]	$975,000	$546,000	56.0%	$429,000	44.0%
Product sustaining                 [Refer working note 8]	$470,000	$235,000	50.0%	$235,000	50.0%
Total cost assigned to products	$8,577,550	$3,526,050		$5,051,500
Costs not assigned to products
Other                   [Mentioned in question]	$60,250
Total cost                 [$8,577,550 + $60,250]	$8,637,800