Question

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

	Xtreme			Pathfinder
Selling price per unit	$	126.00		$	91.00
Direct materials per unit	$	63.20		$	51.00
Direct labor per unit	$	11.70		$	9.00
Direct labor-hours per unit		1.3	DLHs		1.0	DLHs
Estimated annual production and sales		21,000	units		75,000	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	$	2,250,600
Estimated total direct labor-hours		102,300	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			Expected Activity
Activities and Activity Measures				Xtreme	Pathfinder	Total
Supporting direct labor (direct labor-hours)	$	767,250		27,300	75,000	102,300
Batch setups (setups)		722,000		210	170	380
Product sustaining (number of products)		670,000		1	1	2
Other		91,350		NA	NA	NA
Total manufacturing overhead cost	$	2,250,600

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

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Predetermined Overhead Rate:	Manufacturing Overhead/Direct Labor Hours
	$2,250,600/$102,300
	$                                                                            22.00	per Direct Labor Hour
Requirement -1
		Xtreme	Pathfinder	Total
Sale Revenue	21,000*$126 and 75,000*$91	$       2,646,000	$       6,825,000	$        9,471,000
Less:
Direct Material	21,000*$63.20 and 75,000*$51	$       1,327,200	$       3,825,000	$        5,152,200
Direct Labor	21,000*$11.70 and 75,000*$9	$           245,700	$           675,000	$            920,700
Manufacturing Overheads	21,000*22*1.3 and 75,000*22*1	$           600,600	$       1,650,000	$        2,250,600
Product Gross Margin		$           472,500	$           675,000	$        1,147,500
Requirement -2
		Xtreme	Pathfinder	Total
Sale Revenue	21,000*$126 and 75,000*$91	$       2,646,000	$       6,825,000	$        9,471,000
Less:
Direct Material	21,000*$63.20 and 75,000*$51	$       1,327,200	$       3,825,000	$        5,152,200
Direct Labor	21,000*$11.70 and 75,000*$9	$           245,700	$           675,000	$            920,700
Manufacturing Overheads		$           938,750	$       1,220,500	$        2,159,250
Product Gross Margin		$           134,350	$       1,104,500	$        1,238,850
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	$                                                                       767,250	102300	$                    7.5	27300	$                      204,750	75000	$                      562,500
Batch Setups	$                                                                       722,000	380	$            1,900.0	210	$                      399,000	170	$                      323,000
Product Sustaining	$                                                                       670,000	2	$       335,000.0	1	$                      335,000	1	$                      335,000
Total	$                                                                   2,159,250				$                      938,750		$                   1,220,500
Requirement -3
Traditional:		Xtreme		Pathfinder		Total Amount
		Amount	%	Amount	%
Direct Material		$       1,327,200	61.06%	$        3,825,000	62.20%	$        5,152,200
Direct Labor		$           245,700	11.30%	$            675,000	10.98%	$            920,700
Manufacturing Overheads		$           600,600	27.63%	$        1,650,000	26.83%	$        2,250,600
Total Cost Assigned to product		$       2,173,500		$        6,150,000		$        8,323,500
Cost not assigned
Total Cost						$        8,323,500
Activity Based:
		Xtreme		Pathfinder		Total Amount
		Amount	%	Amount	%
Direct Costs:
Direct Material		$       1,327,200	52.84%	$        3,825,000	66.86%	$        5,152,200
Direct Labor		$           245,700	9.78%	$            675,000	11.80%	$            920,700
Indirect Costs:
Supporing Direct Labors		$           204,750	8.15%	$            562,500	9.83%	$            767,250
Batch Setups		$           399,000	15.89%	$            323,000	5.65%	$            722,000
Product Sustaining		$           335,000	13.34%	$            335,000	5.86%	$            670,000
Total Cost Assigned to product		$       2,511,650		$        5,720,500		$        8,232,150
Cost not assigned
Manufacturing Overheads	Other from table given					$              91,350
Total Cost						$        8,323,500