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 Expected Activity Overhead Cost Xtreme Pathfinder Total $ 588,500 42,000 65,000 107,000 690,000 390 300 690 500,000 1 40,500 NA NA NA $ 1,819,000 1 2 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 Xtreme | Pathfinder Prodcut Margin 392000 390000 2 Product Margin under Activity Based costing Xtreme Pathfinder Prodcut Margin 235000 587500 Total 782000 Total 822500

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 | 1820000 35.0% 3380000 65.0% 5200000 DirectLabor | 378000 39.3% 585000 60.7% 963000 Manufacturing Overheads 7140001 39.3% 1105000 60.7% 1819000 Cost Assigned to Prodcut 2912000 5070000 7982000 Quantitative Comparison of Acticity Based Cost Assignments Xtreme Pathfinder Total Activty Based Costing System Amount % Amount % Direct Cost Direct Material 1820000 35.0% 3380000 65.0% 5200000 Direct Labor 378000 39.3% 585000 60.7% 963000 Indirect Cost Supporing direct Labor 231000 39.3% 357500 60.7% 588500 Batch setup L 56.5% 300000 43.5% 690000 Prodcut Sustainind 250000 50.0% 250000 50.0% 500000 Total Cost Assigned to Products 3069000 4872500 7941500 Cost Not asigned to the Products Other 40500 Total Cost 7982000

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

Determination of Activity Rate Activty Pool Estimated OH Supporing direct Labor 588500 Batch setup 690000 Prodcut Sustainind 500000 Base Activity Rate 107000 5.50 690 1000 2 250000 Activity Based Costing System Xtreme Pathfinder Total sales 3304000 54600008764000 Direct Material 1820000 3380000 5200000 Direct Labor 378000 585000 963000 Supporing direct Labor 231000 357500 588500 Batch setup 390000 300000 690000 Prodcut Sustainind 250000 250000 500000 Total Cost 3069000 4872500 7941500 Product Margin 235000 587500 822500