Question

Problem 5-17 (Algo) Comparing Traditional and Activity-Based Product Margins (LO5-1, LO5-3, LO5-4, LO5-5) 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 $ 120.00 $ 63.60 $ 12.00 1.2 DLHS 25,000 units Pathfinder $ 87.00 $ 55.00 $ 10.00 1.0 DLHS 72,000 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 $ 2,040,000 102,000 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 $ 622,200 30,000 72,000 102,000 644,000 250 210 460 700,000 1 1 73, 800 NA $ 2,040,000 NA NA

Answer 1

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 1590000 28.6% 3960000 71.4% 5550000 DirectLabor 300000 29.4% 720000 70.6% 1020000 Manufacturing Overheads 600000 29.4% 1440000 70.6% 2040000 Cost Assigned to Prodcut 2490000 6120000 8610000 Quantitative Comparison of Acticity Based Cost Assignments Xtreme Pathfinder Activty Based Costing System Amount | % Amount % Direct Cost Direct Material 1590000 28.6% 3960000 71.4% 5550000 Direct Labor 300000 29.4% 720000 70.6% 1020000 Indirect Cost Supporing direct Labor 183000 29.4% 439200 70.6% 622200 Batch setup 350000 54.3% 294000 45.7% 644000 Prodcut Sustainind 350000 50.0% 350000 50.0% 700000 Total Cost Assigned to Products 2773000 5763200 8536200 Cost Not asigned to the Products Other 73800 Total Cost 8610000

Working Notes Xtreme Selling Price 120.00 Direct Material 63.60 Direct Labor 12.00 Dirct Labou hour Per unit 1.20 Estimated Production 25000 Pathfinder 87.00 55.00 10.00 1.00 72000 Estimated MOH Estimated Labor hours Predetermined Overhead Rate Total Direct Labor Hours =(Units * Direct Labor Hour) 2040000 102000 20.00 2040000/102000 Xtreme Pathfinder Total 30000 72000 102000 Traditional Costing System Xtreme Pathfinder Total sales 3000000 62640009264000 Direct Material 1590000 3960000 5550000 Direct Labor 300000 720000 1020000 Manufacturing Overheads 600000 1440000 2040000 Total Manufacturing Cost 2490000 6120000 8610000 Product Margin 510000 144000 654000

D Determination of Activity Rate Activty Pool Estimated OH Supporing direct Labor 622200 Batch setup 644000 Prodcut Sustainind 700000 Base Activity Rate 102000 6.10 1400 350000 460 Activity Based Costing System Xtreme Pathfinder Total sales 3000000 6264000 9264000 Direct Material 1590000 3 960000 5550000 Direct Labor 300000 720000 1020000 Supporing direct Labor 183000 439200 622200 Batch setup 350000 294000 644000 Prodcut Sustainind 350000 350000 700000 Total Cost 2773000 5763200 8536200 Product Margin 227000 500800 727800

Answers 1 Product Margin under Traditional Costing Xtreme | Pathfinder Prodcut Margin 510000 144000 2 Product Margin under Activity Based costing Xtreme Pathfinder Prodcut Margin 227000 500800 Total 654000 Total 727800