Question

Problem 7-17 Comparing Traditional and Activity-Based Product Margins (L07-1, LO7-3, L07-4, LO7-5) Smoky Mountain Corporation makes two types of hiking boots--the Xtreme and the Pathfinder Data concerning these two product lines appear below: points Xtreme $123.00 $ 63.80 $ 10.80 1.2 DLHS 27,000 units Selling price per unit Direct materials per unit Direct labor per unit Direct labor-hours per unit Estimated annual production and sales $ $ Pathfinder 86.ee 50.00 9.89 1.0 DLHS 74,000 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 overhea Estimated total direct labor-hours 2, 3de, tea 186, 480 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) Estimated Overhead Cost $ 691,600 900,000 700,000 42200 52, 40, bee Expected Activity Xtrese Pathfinder Total 32,400 74.000 106,400 270 Other Total manufacturing overhead cost 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

Answer 1

Answer to Part 1.: Computation of Product Margins Using Traditional Approach: Xtreme Pathfinder 3,321,000 6,364,000 Sales Total 9,685,000 Costs: Direct Materials Direct Labor Manufacturing Overhead Applied Total Manufacturing Cost 1,722,600 291,600 712,800 2,727,000 3,700,000 666,000 1,628,000 5,994,000 5,422,600 957,600 2,340,800 8,721,000 Product Margin 594,000 370,000 964,000 Calculation: Predetermined Overhead Rate = Estimated Total Manufacturing Overhead Cost / Estimated Total DLH Predetermined Overhead Rate = 2,340,800 / 106,400 Predetermined Overhead Rate = $22.00 per DLH

Answer to Part 2. Activity Cost Pool Supporting Direct Labor Batch Setups Product Sustaining Estimated Estimated Overhead Cost Activity 691,600 106,400 DLH 900,000 500 Setups 700,000 2 Products Activity Rate 6.50 per DLH 1,800 per Setups 350,000 per Product Calculation of Product Margins using Activity Based Costing System: Xtreme Pathfinder Total 3,321,000 6,364,000 9,685,000 Sales Costs: Direct Materials Direct Labor Supporting Direct Labor Batch Setups Product Sustaining Total Costs 1,722,600 291,600 210,600 486,000 350,000 3,060,800 3,700,000 666,000 481,000 414,000 350,000 5,611,000 5,422,600 957,600 691,600 900,000 700,000 8,671,800 Product Margin 260,200 753,000 1,013,200

Total Answer to Part 3. Xtreme % of Total Amount Amount Pathfinder % of Total Amount Amount Amount Traditional Cost System: Direct Materials Direct Labor Manufacturing Overhead Total Costs assigned to Products 1,722,600 291,600 712,800 2,727,000 31.77% 30.45% 30.45% 3,700,000 666,000 1,628,000 5,994,000 68.23% 69.55% 69.55% 5,422,600 957,600 2,340,800 8,721,000 Total Xtreme % of Total Amount Amount Pathfinder % of Total Amount Amount Amount 1,722,600 291,600 31.77% 30.45% 3,700,000 666,000 68.23% 69.55% 5,422,600 957,600 Activity Based Costing System: Direct Costs: Direct Materials Direct Labor Indirect Costs: Supporting Direct Labor Batch Setups Product Sustaining Total Cost assigned to Products Cost not assigned to Products: Other Total Cost 210,600 486,000 350,000 3,060,800 30.45% 54.00% 50.00% 481,000 414,000 350,000 5,611,000 69.55% 46.00% 50.00% 691,600 900,000 700,000 8,671,800 49,200 8,721,000