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 Estimated annual production and sales Xtreme $ 124.00 $ 63.40 $ 14.40 1.8 DLHS 23,000 units Pathfinder $ 88.00 $ 53.00 $ 8.00 1.0 DLHS 70,000 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 $ 2,005, 200 111,400 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): Activities and Activity Measures Supporting direct labor (direct labor-hours) Batch setups (setups) Product sustaining (number of products) Other Total manufacturing overhead cost Estimated Overhead Cost $ 712,960 504,000 740,000 48,240 $ 2,005, 200 Expected Activity Xtreme Pathfinder Total 41,400 70,000 111,400 230 190 420 1 1 2 NA NA NA 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

1)
Estimated total manufacturing overhead (a)	$2,005,200.00
Estimated total direct labor-hours (b)	111,400	DLH
Predetermined overhead rate = a/b	$18.00	Per DLH
Product Margin- Traditional
	Xtreme	Pathfinder	Total
Sales	$ 2,852,000.00	$6,160,000.00	$  9,012,000.00
Direct materials	$ 1,458,200.00	$3,710,000.00	$  5,168,200.00
Direct labor	$    331,200.00	$560,000.00	$     891,200.00
Manufacturing overhead applied @ $18.00 per direct labor-hour	$745,200.00	$1,260,000.00	$  2,005,200.00
Total manufacturing cost	$ 2,534,600.00	$   5,530,000.00	$  8,064,600.00
Product margin	$    317,400.00	$      630,000.00	$     947,400.00
2)
Product Margin – ABC
	Estimated
Activities and Activity Measures	Overhead Cost	Total Activity	Cost per activity
Supporting direct labor (direct labor-hours)	$    712,960.00	111,400	$                6.40	Per DLH
Batch setups (setups)	$    504,000.00	420	$         1,200.00	Per Setup
Product sustaining (number of products)	$    740,000.00	2	$     370,000.00	per product
Total manufacturing overhead cost	$ 1,956,960.00
	Xtreme	Pathfinder	Total
Sales	$ 2,852,000.00	$6,160,000.00	$  9,012,000.00
Direct Cost:
Direct materials	$ 1,458,200.00	$   3,710,000.00	$  5,168,200.00
Direct labor	$    331,200.00	$      560,000.00	$     891,200.00
Indirect Cost:
Supporting direct labor	$    264,960.00	$      448,000.00	$     712,960.00
Batch setups	$    276,000.00	$      228,000.00	$     504,000.00
Product sustaining	$    370,000.00	$      370,000.00	$     740,000.00
Total cost Assigned to Products	$ 2,700,360.00	$   5,316,000.00	$  8,016,360.00
Product margin	$    151,640.00	$      844,000.00	$     995,640.00
3)
The quantitative Decision
Traditional cost System
	Xtreme		Pathfinder		Total
	Amount	%	Amount	%
Direct materials	$ 1,458,200.00	28.21%	$3,710,000.00	71.79%	$ 5,168,200.00
Direct labor	$    331,200.00	37.16%	$560,000.00	62.84%	$    891,200.00
Manufacturing overhead applied @ $18.00 per direct labor-hour	$    745,200.00	37.16%	$1,260,000.00	62.84%	$ 2,005,200.00
Total manufacturing cost	$ 2,534,600.00	31.43%	$  5,530,000.00	68.57%	$ 8,064,600.00
Activity Based Costing
Direct Cost:
Direct materials	$ 1,458,200.00	28.21%	$  3,710,000.00	71.79%	$ 5,168,200.00
Direct labor	$    331,200.00	37.16%	$     560,000.00	62.84%	$    891,200.00
Indirect Cost:
Supporting direct labor	$    264,960.00	37.16%	$     448,000.00	62.84%	$    712,960.00
Batch setups	$    276,000.00	54.76%	$     228,000.00	45.24%	$    504,000.00
Product sustaining	$    370,000.00	50.00%	$     370,000.00	50.00%	$    740,000.00
Total cost Assigned to Products	$ 2,700,360.00	33.69%	$  5,316,000.00	66.31%	$ 8,016,360.00
Cost not assigned to products
Others					$      48,240.00
Total Cost					$ 8,064,600.00

с D E 88 53 8 1 70000 DLHS units DLHS units DLHS Activity Xtreme 41400 230 A B 3 Selling price per unit 124 4 Direct materials per unit 63,4 5 Direct labor per unit 14.4 6 Direct labor-hours per unit 1.8 7 Estimated annual production and sales 23000 8 The company has a traditional costing system in which manufacturing overhead is applied 9 Estimated total manufacturing overhead 2005200 10 Estimated total direct labor-hours 111400 11 Required: (Provide step-by-step solutions if possible.) 12 1. Compute the product margins for the Xtreme and the Pathfinder products under the com 13 2. The company is considering replacing its traditional costing system with an activity-baser 14 Estimated 15 Activities and Activity Measures Overhead Cost 16 Supporting direct labor (direct labor-hours) 712960 17 Batch setups (setups) 504000 18 Product sustaining (number of products) 740000 19 Other 48240 20 Total manufacturing overhead cost =SUM(B16:B19) 21 Compute the product margins for the Xtreme and the Pathfinder products under the activity 22 3. Prepare a quantitative comparison of the traditional and activity-based cost assignments 23 24 1) 25 Estimated total manufacturing overhead (a) =B9 26 Estimated total direct labor-hours (b) =B10 27 Predetermined overhead rate = a/b =B25/B26 28 Product Margin- Traditional 29 Xtreme 30 Sales =B7B3 31 Direct materials =B4B7 Direct labor =B5 B7 Pathfinder 70000 190 1 NA Total 111400 420 2 NA 1 NA DLH Per DLH Pathfinder =D7 DE Total =B30+C30 32 33 =D4 D7 =D5 D7 =B32+C32 =B33+C33 =B6 B7%B27 =SUM(B32:B34) =B30-B35 =D6D7B27 =SUM(C32:C34) =C30-035 =B34+234 =B35+C35 =B36+C36 34 Manufacturing overhead applied @ $18.00 per direct labor-hour 35 Total manufacturing cost 36 Product margin 37 38 2) 39 Product Margin - ABC 40 41 Activities and Activity Measures 42 Supporting direct labor (direct labor-hours) 43 Batch setups (setups) 44 Product sustaining (number of products) 45 Total manufacturing overhead cost Estimated Overhead Cost 712960 504000 740000 =SUM(B42:B44) Total Activity -E16 =E17 =E18 Cost per activity =B42/C42 =B43/C43 =B44/C44 Per DLH Per Setup per product

A B с D E F Xtreme =B30 Pathfinder =C30 Total =B48+C48 =B32 =B33 =C32 =C33 =D32 =D33 46 47 . 48 Sales 20 49 Direct Cost: 50 Direct materials 51 Direct labor 52 Indirect Cost: 53 Supporting direct labor 54 Batch setups end 55 Product sustaining 56 Total cost Assigned to Products 57 Product margin 58 59 60 3) 61 The quantitative Decision 62 Traditional cost System 63 ca 64 65 Direct materials 66 Direct labor =D42*C16 =D43*C17 =D44°C18 =SUM(B50:355) =B48-B56 =D42D16 =D43*D17 =D44%D18 =SUM(C50:C55) =C48-C56 =B53+C53 =B54+C54 =B55+C55 =SUM(D50:055) =D48-D56 Total Xtreme Amount =B32 =B33 % =B65/F65 =B66/F66 Pathfinder Amount =C32 =C33 % =D65/F65 =D66/F66 =B65+D65 =B66+D66 =B34 =SUM(B65:B67) =B67/F67 =B68/F68 =C34 =SUM(D65:D67) =D67/F67 =D68/F68 =B67+D67 =B68+D68 =B50 =B51 =B72/F72 =B73/F73 =C50 =C51 =D72/F72 =D73/F73 =D50 =D51 67 Manufacturing overhead applied @ $18.00 per direct labor-hour 68 Total manufacturing cost 69 70 Activity Based Costing 71 Direct Cost: 72 Direct materials 73 Direct labor 74 Indirect Cost: 75 Supporting direct labor 76 Batch setups 77 Product sustaining 78 Total cost Assigned to Products 79 Cost not assigned to products 80 Others 81 Total Cost 82 =B53 =B54 =B55 =B56 =B75/F75 =B76/F76 =B77/F77 =B78/F78 =C53 =C54 =C55 =C56 =D75/F75 =D76/F76 =D77/F77 =D78/F78 =D53 =D54 =D55 =D56 =B19 =F78+F80