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 stimated annual production and sales Xtreme $ 130.00 64.30 11.20 Pathfinder 91.00 50.00 8.00 1.0 DLHS 72,000 units DLHS 21,000 unit Ences 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 thead $ 2,230,800 101,400 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): RA Activities and Activity Measures Supporting direct labor (direct labor Batch setups (setups) Product sustaining (number of products) Other Total manufacturing overhead cost Estimated Overhead Cost $ 699,660 660,000 780,000 91,140 $ 2, 230,800 Expected Activity Xtreme Pathfinder Total 29,480 72,000 101,489 320 230 550 2 NA NA eBook Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system. Print 3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. ferences

Answer 1

Predetermined overhead rate = Estimated total manufacturing overhead/Estimated total direct labor-hours = $2230800/101400 DLH = $22 per DLH

1.

	Xtreme	Pathfinder
Sales $	2730000	6552000
Less: Variable costs
Direct materials	1350300	3600000
Direct labor	235200	576000
Manufacturing overhead	646800	1584000
	(21000 x 1.4 x $22)	(72000 x 1.0 x $22)
Total variable cost $	2232300	5760000
Product margin $	497700	792000

2.

Activity Cost Pool	Estimated Overhead $	Expected Use of Cost Drivers		Activity-Based Overhead Rate $
Supporting direct labor	699660	101400	DLH	6.90	per DLH
Batch setups	660000	550	setups	1200	per setup
Product sustaining	780000	2	products	390000	per product
Other	91140	NA		NA
Total	2230800

	Xtreme			Pathfinder
Activity Cost Pool	Expected Use of Drivers	Activity-Based Overhead Rates $	Cost Assigned $	Expected Use of Drivers	Activity-Based Overhead Rates $	Cost Assigned $
Supporting direct labor	29400	6.90	202860	72000	6.90	496800
Batch setups	320	1200	384000	230	1200	276000
Product sustaining	1	390000	390000	1	390000	390000
Total costs assigned $			976860			1162800

	Xtreme	Pathfinder
Sales	2730000	6552000
Less: Variable costs
Direct materials	1350300	3600000
Direct labor	235200	576000
Manufacturing overhead	976860	1162800
Total variable cost $	2562360	5338800
Product margin $	167640	1213200

3.

	Xtreme		Pathfinder		Total
	Amount	% of Total Amount	Amount	% of Total Amount	Amount
Traditional Cost System
Direct materials	1350300	27.3%	3600000	72.7%	4950300
Direct labor	235200	29.0%	576000	71.0%	811200
Manufacturing overhead	646800	29.0%	1584000	71.0%	2230800
Total cost assigned to products	2232300		5760000		7992300
	Xtreme		Pathfinder		Total
	Amount	% of Total Amount	Amount	% of Total Amount	Amount
Activity-Based Costing System
Direct costs:
Direct materials	1350300	27.3%	3600000	72.7%	4950300
Direct labor	235200	29.0%	576000	71.0%	811200
Indirect costs:
Supporting direct labor	202860	29.0%	496800	71.0%	699660
Batch setups	384000	58.2%	276000	41.8%	660000
Product sustaining	390000	50.0%	390000	50.0%	780000
Total cost assigned to products	2562360		5338800		7901160
Costs not assigned to products
Other					91140
Total cost					7992300