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Problem 7-17 Comparing Traditional and Activity-Based Product Margins [LO7-1, LO7-3, LO7-4, LO7-5) Smoky Mountain Corporation makes two types of hiking boots-the Xtreme and the Pathfinder Data concerning these two product lines appear below: Fathunder $ 91.00 Selling price per unit Direct materiale per unit Direct labor per unit Direct laber-hours per unit Estimated annual production and wales $126.00 63.20 $31.70 1.3 DLHE 21,000 units $ 9.00 2.0 DLHS 75,000 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 $2,250, 600 102,300 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 (setupa) Product sustaining number of products) Other Total manufacturing overhead cost Eatinated Expected Activity Overhead Cost Xereme Pathfinder Total $ 767, 250 27,300 15,000 102.300 722.000 210 170 380 670,000 91,350 NA NA $ 2.250, 600 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

Solution 1:

Overhead rate = 2250600/102300 = $22 per DLH

Computation of Product Margin - Traditional Costing System
Particulars	Xtreme	Pathfinder	Total
Selling price per unit	$126.00	$91.00
Direct material per unit	$63.20	$51.00
Direct labor per unit	$11.70	$9.00
Manufacturing overhead cost per unit (Direct labor hours per unit* $22)	$28.60	$22.00
Product Margin per unit	$22.50	$9.00
Nos of units sold	21000	75000
Total Margin (Product margin per unit * Nos of unit sold)	$4,72,500	$6,75,000	$11,47,500

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	$7,67,250.00	Direct Labor hours	102300	$7.50	27300	$2,04,750.00	75000	$5,62,500.00
Batch Setups	$7,22,000.00	Setups	380	$1,900.00	210	$3,99,000.00	170	$3,23,000.00
Product sustaining	$6,70,000.00	Number of products	2	$3,35,000.00	1	$3,35,000.00	1	$3,35,000.00
Other	$91,350.00	No allocation
Total	$22,50,600.00					$9,38,750.00		$12,20,500.00
Nos of units						21000		75000
Allocated overhead per unit						$44.70		$16.27

Computation of Product Margin - Activity based Costing System
Particulars	Xtreme	Pathfinder	Total
Selling price per unit	$126.00	$91.00
Direct material per unit	$63.20	$51.00
Direct labor per unit	$11.70	$9.00
Allocated Manufacturing overhead cost per unit	$44.70	$16.27
Product Margin per unit	$6.40	$14.73
Nos of units sold	21000	75000
Total Margin (Product margin per unit * Nos of unit sold)	$1,34,350	$11,04,500	$12,38,850

Solution 3:

Quantity comparison of traditional cost assignment
Particulars	Xtreme		Pathfinder		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Material Cost	$13,27,200.00	25.76%	$38,25,000.00	74.24%	$51,52,200.00
Direct Labor Cost	$2,45,700.00	26.69%	$6,75,000.00	73.31%	$9,20,700.00
Manufacturing Overhead cost	$6,00,600.00	26.69%	$16,50,000.00	73.31%	$22,50,600.00
Total Cost assigned to Product	$21,73,500.00		$61,50,000.00		$83,23,500.00
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	$13,27,200.00	25.76%	$38,25,000.00	74.24%	$51,52,200.00
Direct Labor Cost	$2,45,700.00	26.69%	$6,75,000.00	73.31%	$9,20,700.00
Indirect Cost:
Supporting direct labor cost	$2,04,750.00	26.69%	$5,62,500.00	73.31%	$7,67,250.00
Batch Setups	$3,99,000.00	55.26%	$3,23,000.00	44.74%	$7,22,000.00
Product sustaining	$3,35,000.00	50.00%	$3,35,000.00	50.00%	$6,70,000.00
Total Cost Assigned to Products	$25,11,650.00		$57,20,500.00		$82,32,150.00
Cost not assigned to products:
Others					$91,350.00
Total Cost					$83,23,500.00