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		$	92.00
Direct materials per unit	$	63.50		$	54.00
Direct labor per unit	$	13.50		$	9.00
Direct labor-hours per unit		1.5	DLHs		1.0	DLHs
Estimated annual production and sales		24,000	units		71,000	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	$	2,033,000
Estimated total direct labor-hours		107,000	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)	$	663,400		36,000	71,000	107,000
Batch setups (setups)		572,000		240	200	440
Product sustaining (number of products)		750,000		1	1	2
Other		47,600		NA	NA	NA
Total manufacturing overhead cost	$	2,033,000

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

	Xtreme	Pathfinder
Selling price per unit	120	92
Direct materials per unit	63.5	54
Direct labor per unit	13.5	9
Direct labor-hours per unit	1.5	1
Estimated annual production and sales	24,000	71,000
		Expected Activity
	Estimated
	Overhead Cost	Xtreme	Pathfinder	Total
Supporting direct labor (direct labor-hours)	663,400	36,000	71,000	107,000
Batch setups (setups)	572,000	240	200	440
Product sustaining (number of products)	750,000	1	1	2
Other	47,600	NA	NA	NA
Total manufacturing overhead cost	2,033,000
1.Predetermined rate under traditional system = Estimated overheads/Estimated labor hours
=2033000/107000
19	per labor hour
Calculation of product Margin
	Xtreme	Pathfinder
Sales	2,880,000	6,532,000
Direct Material	1,524,000	3,834,000
Direct labor	324,000	639,000
Overheads	684,000	1,349,000
Product margin	348,000	710,000
Using ABC						Overhead assigned = Activity concumed*Rate
	Overhead Cost	Xtreme	Pathfinder	Total	Activity Rate = Overhead/Total Activity	Xtreme	Pathfinder
Supporting direct labor (direct labor-hours)	663,400	36,000	71,000	107,000	6.2	223200	440200
Batch setups (setups)	572,000	240	200	440	1300	312000	260000
Product sustaining (number of products)	750,000	1	1	2	375000	375000	375000
Other	47,600	NA	NA	NA
Total manufacturing overhead cost	2,033,000
				Total assigned		910200	1075200
Calculation of product Margin
	Xtreme	Pathfinder
Sales	2,880,000	6,532,000
Direct Material	1,524,000	3,834,000
Direct labor	324,000	639,000
Overheads	910,200	1,075,200
Product margin	121,800	983,800
Comparison
	Xtreme	Pathfinder
Traditional costing	348,000	710,000
ABC Costing	121,800	983,800
Difference	226,200	(273,800)