Question

Exercise 3-10 Contrasting ABC and Conventional Product Costs [LO3-2, LO3-3, LO3-4]

Rocky Mountain Corporation makes two types of hiking boots—Xactive and Pathbreaker. Data concerning these two product lines appear below:

	Xactive			Pathbreaker
Direct materials per unit	$	63.80		$	50.00
Direct labor cost per unit	$	17.20		$	12.00
Direct labor-hours per unit		1.4	DLHs		1	DLHs
Estimated annual production and sales		15,000	units		65,000	units

The company has a conventional 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	$1,634,000
Estimated total direct labor-hours	86,000	DLHs

Required:

1-a.	Compute the predetermined overhead rate based on direct labor-hours. (Round the intermediate calculations and final answer to two decimal places.)

1-b.	Using the predetermined overhead rate and other data from the problem, determine the unit product cost of each product. (Round the intermediate calculations and final answer to two decimal places.)

2.	The company is considering replacing its conventional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools:

  

	Estimated Overhead Cost		Expected Activity
Activity Cost Pools and Activity Measures			Xactive	Pathbreaker	Total
Supporting direct labor (direct labor-hours)	$	580,500	21,000	65,000	86,000
Batch setups (setups)		360,000	200	100	300
Product sustaining (number of products)		639,500	1	1	2
General factory (machine-hours)		54,000	1,500	6,500	8,000
Total manufacturing overhead cost	$	1,634,000

	Determine the activity rate for each of the four activity cost pools. (Round your final answers to 2 decimal places.)

3.	Using the activity rates and other data from the problem, determine the unit product cost of each product. (Round the intermediate calculations and final answer to two decimal places.)

Answer 1

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Requirement -1
Predetermined Overhead Rate:	Manufacturing Overhead/Direct Labor Hours					Pathbreaker
	1634000/86000					Xactive
	$                                                                            19.00	per Direct Labor Hour
Requirement -2
		Xactive	Pathbreaker
Direct Material		$                63.80	$                50.00
Direct Labor		$                17.20	$                12.00
Manufacturing Overheads	19*1.4 and 19*1	$                26.60	$                19.00
Product Gross Margin		$             107.60	$                81.00
Requirement -3
Working for Overhead allocation:
				Xtreme		Pathfinder
Acticity Cost Pool	Manufacturing overhead	Total Activity	Activity Rate	no of Activities	Overhead Allocated	no of Activities	Overhead Allocated
	A	B	A/B=C	D	D*C	E	E*C
Supporing Direct Labors	$                                                                       580,500	86000	$                    6.8	21000	$                      141,750	65000	$                      438,750
Batch Setups	$                                                                       360,000	300	$            1,200.0	200	$                      240,000	100	$                      120,000
Product Sustaining	$                                                                       639,500	2	$       319,750.0	1	$                      319,750	1	$                      319,750
General Factor	$                                                                         54,000	8000	$                    6.8	1500	$                         10,125	6500	$                         43,875
Total	$                                                                   1,634,000				$                      711,625		$                      922,375
Requirement -4
		Xactive	Pathbreaker
Direct Material		$                63.80	$                50.00
Direct Labor		$                17.20	$                12.00
Manufacturing Overheads		$                47.44	$                14.19
Product Gross Margin		$             128.44	$                76.19
Total Overheads	a	$           711,625	$           922,375
No of Units	b	15000	65000
Overhead per unit	a/b	$                47.44	$                14.19