Question

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: Selling price per unit Direct materials per unit Direct labor per unit Direct labor-hours per unit Estimated annual production and sales Xtreme $ 132.00 $ 64.60 $ 9.60 1.2 DLHS 24,000 units $ $ $ Pathfinder 94.00 53.00 8.00 1. O 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 tot al manufacturing overhead Estimated tot al direct labor-hours 2,470,000 98, 800 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): Estimated Overhead Cost $ 642, 200 915, 000 840,000 72, 800 $ 2, 470,000 Expected Activity Xtreme Pathfinder Total 2 8, 800 70, 000 98, 800 350 260 610 Activities and Activity Measures Supporting direct labor (direct labor-hours) Batch setups (set ups) Product sustaining (number of products) Other Tot al manufacturing overhead cost NA NA Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system.

Answer 1

Answers 1 Product Margin under Traditional Costing Xtreme / Pathfinder Prodcut Margin 667200 560000 2 Product Margin under Activity Based costing Xtreme Pathfinder Prodcut Margin 255000 1045000 Total 1227200 Total 1300000

3. Quantitative Comparision of the Traditional and Activity Based Cost Assignments Quantitative comparsion of the Traditional Cost Xtreme Pathfinder Total Traditional Costing System Amount % Amount Direct Material 1550400 29.5% 3710000 70.5% 5260400 DirectLabor 230400 29.1% 560000 70.9% 790400 Manufacturing Overheads 720000 29.1% 1750000 70.9% 2470000 Cost Assigned to Prodcut 2500800 6020000 8520800 Quantitative Comparison of Acticity Based Cost Assignments Xtreme Pathfinder Total Activty Based Costing System Amount % Amount % Direct Cost Direct Material 15504001 29.5% 3710000 70.5% 5260400 Direct Labor 230400 29.1% 560000 70.9% 790400 Indirect Cost Supporing direct Labor 187200 29.1% 455000 70.9% 642200 Batch setup 525000 57.4% 390000 42.6% 915000 Prodcut Sustainind 420000 50.0% 420000 50.0% 840000 Total Cost Assigned to Products 2913000 5535000 8448000 Cost Not asigned to the Products Other 72800 Total Cost 8520800

Working Notes Xtreme Selling Price 132.00 Direct Material 64.60 Direct Labor 9.60 Dirct Labou hour Per unit 1.20 Estimated Production 24000 Pathfinder 94.00 53.00 8.00 1.00 70000 Estimated MOH Estimated Labor hours Predetermined Overhead Rate Total Direct Labor Hours =(Units * Direct Labor Hour) 2470000 98800 25.00 2470000/98800 Xtreme Pathfinder Total 28800 70000 98800 Traditional Costing System Xtreme Pathfinder sales 3168000 6580000 Direct Material 1550400 3710000 Direct Labor 2304001 560000 Manufacturing Overheads 720000 1750000 Total Manufacturing Cost 2500800 6020000 Product Margin 667200 560000 Total 9748000 5260400 790400 2470000 8520800 1227200

Determination of Activity Rate Activty Pool Estimated OH Supporing direct Labor 642200 Batch setup 915000 Prodcut Sustainind 840000 Base Activity Rate 98800 6.50 610 1500 2 420000 Activity Based Costing System Xtreme | Pathfinder sales 3168000 6580000 Direct Material 15504001 3710000 Direct Labor 230400 560000 Supporing direct Labor 187200 455000 Batch setup 525000 390000 Prodcut Sustainind 420000 420000 Total Cost 2913000 5535000 Product Margin 255000 1045000 Total 9748000 5260400 790400 642200 915000 840000 8448000 1300000