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 $ 123.00 $ 86.00 Direct materials per unit $ 63.80 $ 50.00 Direct labor per unit $ 10.80 $ 9.00 Direct labor-hours per unit 1.2 DLHs 1.0 DLHs Estimated annual production and sales 27,000 units 74,000 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 $ 2,340,800 Estimated total direct labor-hours 106,400 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) $ 691,600 32,400 74,000 106,400 Batch setups (setups) 900,000 270 230 500 Product sustaining (number of products) 700,000 1 1 2 Other 49,200 NA NA NA Total manufacturing overhead cost $ 2,340,800 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

	1
	Product margin under traditional system is
		Xtreme	Pathfinder	Total
A	No. of units	27,000	74,000	101,000
B	Sale price per unit	123	86
C=A*B	Sale Value	3,321,000	6,364,000	9,685,000
D	Direct Material	1,722,600	3,700,000	5,422,600
E	Direct Labor	291,600	666,000	957,600
F=D+E	Total Direct Costs	2,014,200	4,366,000	6,380,200
G	Manufacturing Overhead	712,800	1,628,000	2,340,800
H =F+G	Total Product Cost	2,727,000	5,994,000	8,721,000
I=C-H	Product Margin	594,000	370,000	964,000

	2
	Product Margin under ABC system is
		Xtreme	Pathfinder	Total
A	No. of units	27,000	74,000	101,000
B	Sale price per unit	123	86
C=A*B	Sale Value	3,321,000	6,364,000	9,685,000
D	Direct Material	1,722,600	3,700,000	5,422,600
E	Direct Labor	291,600	666,000	957,600
F=D+E	Total Direct Costs	2,014,200	4,366,000	6,380,200
G	Manufacturing Overhead (ABC)	1,046,600	1,245,000	2,291,600
H =F+G	Total Product Cost	3,060,800	5,611,000	8,671,800
I=C-H	Product Margin	260,200	753,000	1,013,200
	Activity	Activity Cost Pool	Cost driver	Xtreme	Calculation	Pathfinder	Calculation
	Supporting direct labour	$691,600	Direct labour hours	210,600	32400/106400*691600	481,000	74000/106400*691600
	Batch setups	$900,000	Setup hours	486,000	270/500*900000	414,000	230/500*900000
	Product Sustaining	$700,000	No. of products	350,000	1/2*700000	350,000	1/2*700000
	Total	$2,291,600		$1,046,600		$1,245,000

3
Comparison of traditional and activity-based cost assignment is as follows:
Traditional Cost system
	Xtreme		Pathfinder		Total
	Amount	% of total amount	Amount	% of total amount	Amount
Direct material	1,722,600	32%	3,700,000	68%	5,422,600
Direct labour	291,600	30%	666,000	70%	957,600
Manufacturing overhead	712,800	30%	1,628,000	70%	2,340,800
Total cost assigned to products	2,727,000	31%	5,994,000	69%	8,721,000
Activity Based Costing System
	Xtreme		Pathfinder		Total
	Amount	% of total amount	Amount	% of total amount	Amount
Activity Based Costing System
Direct Costs
Direct material	1,722,600	32%	3,700,000	68%	5,422,600
Direct labour	291,600	30%	666,000	70%	957,600
Indirect Costs
Supporting direct labour	210,600	30%	481,000	70%	691,600
Batch setups	486,000	54%	414,000	46%	900,000
Product Sustaining	350,000	50%	350,000	50%	700,000
Total Cost assigned to products	3,060,800	35%	5,611,000	65%	8,671,800
Costs not assigned to products
Other					49,200
Total Costs					8,721,000