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 $ 118.00 $ 65.00 $ 13.50 1.5 DLHS 28,000 units Pathfinder $ 84.00 $ 52.00 $ 9.00 1.0 DLHS 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 Estimated total direct labor-hours $ 1,819,000 107,000 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 $ 588,500 690,000 500,000 40,500 $ 1,819,000 Expected Activity Xtreme Pathfinder Total 42,000 65,000 107,000 390 300 690 1 2. 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

Answers 1 Product Margin under Traditional Costing Pathfinder Total Xtreme Prodcut Margin 392000 390000 782000 2 Product Margin under Activity Based costing Pathfinder Total Xtreme Prodcut Margin 235000 587500 822500

|3. Quantitative Comparision of the Traditional and Activity Based Cost Assignments Quantitative comparsion of the Traditional Cost Total Xtreme Pathfinder Traditional Costing System Direct Material Direc tLabor Manufacturing Overheads Cost Assigned to Prodcut Amount Amount 35.0% 3380000 39.3% 65.0% 5200000 60.7% 963000 60.7% 1819000 1820000 585000 378000 1105000 714000 39.3% 5070000 2912000 7982000 Quantitative Comparison of Acticity Based Cost Assignments Pathfinder Total Xtreme Activty Based Costing System Direct Cost Direct Material Direct Labor Indirect Cost Supporing direct Labor Batch setup Prodcut Sustainind Total Cost Assigned to Products Cost Not asigned to the Products Other Amount Amount % 35.0% 39.3% 65.0% 5200000 1820000 3380000 585000 60.7% 378000 963000 60.7% 588500 231000 357500 39.3% 56.5% 50.0% 43.5% 690000 390000 300000 50.0% 500000 250000 250000 4872500 7941500 3069000 40500 Total Cost 7982000

Working Notes Pathfinder Xtreme Selling Price Direct Material Direct Labor Dirct Labou hour Per unit Estimated Production 118.00 84.00 65.00 52.00 13.50 9.00 1.50 1.00 65000 28000 Estimated MOH Estimated Labor hours Predetermined Overhead Rate 1819000 107000 17.00 1819000/107000 Pathfinder Total Xtreme Total Direct Labor Hours (Units Direct Labor Hour) 42000 65000 107000 Traditional Costing System Total Pathfinder Xtreme sales Direct Material Direct Labor Manufacturing Overheads Total Manufacturing Cost Product Margin 3304000 5460000 8764000 5200000 1820000 3380000 378000 585000 963000 1105000 714000 1819000 5070000 2912000 7982000 392000 390000 782000

Determination of Activity Rate Activty Pool Supporing direct Labor Batch setup Estimated OH Base Activity Rate 588500 5.50 107000 690 1000 690000 Prodcut Sustainind 500000 250000 2 Activity Based Costing System Total Pathfinder Xtreme sales 5460000 3304000 8764000 Direct Material Direct Labor Supporing direct Labor Batch setup Prodcut Sustainind Total Cost 5200000 1820000 3380000 585000 378000 963000 357500 588500 231000 390000 300000 690000 250000 250000 500000 4872500 7941500 3069000 Product Margin 235000 587500 822500