Question

Smoky Mountain Corporation makes two types of hiking boots—Xtreme and the Pathfinder. Data concerning these two product lines appear below:   

	Xtreme			Pathfinder
Selling price per unit	$	118.00			$	84.00
Direct materials per unit	$	65.00			$	52.00
Direct labor per unit	$	13.50			$	9.00
Direct labor-hours per unit		1.5	DLHs			1.0	DLHs
Estimated annual production and sales		28,000	units			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	$	1,819,000
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. (Do not round your intermediate calculations.)

    

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				Activity
Activities and Activity Measures	Overhead Cost					Xtreme			Pathfinder			Total
Supporting direct labor (direct labor-hours)	$	588,500				42,000			65,000			107,000
Batch setups (setups)		690,000				390			300			690
Product sustaining (number of products)		500,000				1			1			2
Other		40,500				NA			NA			NA
Total manufacturing overhead cost	$	1,819,000

Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system. (Negative product margins should be indicated with a minus sign. Round your intermediate calculations to 2 decimal places.)

    

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Do not round intermediate calculations. Round your "Percentage" answer to 1 decimal place. (i.e. .1234 should be entered as 12.3))

Answer 1

1)	overhead rate
	estimated MOH/estimated DLH's
	1,819,000/107000
	17	per direct labor hour
	product margin
				Xtreme	pathfinder	total
	sales			3304000	5460000
	less:Expense
	Direct materials			1820000	3380000
	Direct labor			378000	585000
	overhead			714000	1105000
	total cost			2912000	5070000
	product margin			392000	390000	782000
				Xtreme	pathfinder	total
	product margin			392000	390000	782000	answer
2)	overhead rate					oh rate
				amount	driver
	Activity
	Supporting direct labor			588,500	107,000	5.5
	batch setups			690,000	690	1000
	product sustaining			500,000	2	250000
	allocation of overhead and per unit cost
				Xtremet		Pathfinder
			Rate	driver	OH	Rate	Driver	OH
	Activity
	Supporting direct labor		5.5	42,000	231000	5.5	65,000	357500
	batch setups		1000	390	390000	1000	300	300000
	product sustaining		250000	1	250000	250000	1	250000
	total overhead				871000			907500
	product margin
				Xtreme	pathfinder	total
	Selling price per unit			3304000	5460000
	less:Expense
	Direct materials			1820000	3380000
	Direct labor			378000	585000
	total overhead			871000	907500	1778500
	total cost			3069000.00	4872500.00
	product margin			235000.00	587500.00	822500.00
				Xtreme	pathfinder	total
	product margin			235000	587500	822500	answer
	3)			Xtreme		Pathfinder		total
					% of		% of
				Amount	total amount	Amount	total amount	Amount
	Traditional Cost system
	Direct materials			1820000	35.0%	3380000	65.0%	5200000
	direct labor			378000	39.3%	585000	60.7%	963000
	manufacturing overhead			714000	39.3%	1105000	60.7%	1819000
	total cost assigned to produts			2912000		5070000		7982000
				Xtreme		Pathfinder		total
					% of		% of
				Amount	total amount	Amount	total amount	Amount
	Activity based
	Direct materials			1820000	35.0%	3380000	65.0%	5200000
	direct labor			378000	39.3%	585000	60.7%	963000
	indirect costs
	Supporting direct labor			231000	39.3%	357500	60.7%	588500
	batch setups			390000	56.5%	300000	43.5%	690000
	product sustaining			250000	50.0%	250000	50.0%	500000
	total cost assigned to products			3069000		4872500		7941500
	costs not assigned to products
	other							40,500
	total cost.							7982000