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 $ 124.00 $ 88.00 Direct materials per unit $ 63.40 $ 53.00 Direct labor per unit $ 14.40 $ 8.00 Direct labor-hours per unit 1.8 DLHs 1.0 DLHs Estimated annual production and sales 23,000 units 70,000 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 $ 2,005,200 Estimated total direct labor-hours 111,400 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) $ 712,960 41,400 70,000 111,400 Batch setups (setups) 504,000 230 190 420 Product sustaining (number of products) 740,000 1 1 2 Other 48,240 NA NA NA Total manufacturing overhead cost $ 2,005,200 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

Traditional costing method

overhead allocation
Particulars	Xtreme	Pathfinder	Total
Estimated annual Production (In units)	23000	70000
Direct Labour Hours Per unit	1.8	1
Total Direct Labour Hours	41400	70000	111400
Overhead Cost Allocation basis direct labour hours (Overhead / Total hours * Labor hours of model)	$745,200.00	$1,260,000.00	$2,005,200.00
Manufacturing overhead cost per unit (Allocated Overhead / Nos of units)	$32.40	$18.00

Computation of Product Margin
Particulars	Xtreme	Pathfinder	Total
Selling price per unit	$124.00	$88.00
Direct material per unit	$63.40	$53.00
Direct labor per unit	$14.40	$8.00
Manufacturing overhead cost per unit	$32.40	$18.00
Product Margin per unit	$13.80	$9.00
Nos of units sold	23000	70000
Total Margin(Product margin per unit*No.of unit sold)	$317,400.00	$630,000.00	$947,400.00

Activity based costing

Determination of activity rate for each activity & allocation of overhead
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Xtreme		Pathfinder
					Usage	Allocated Costs	Usage	Allocated Costs
Supporting direct labor cost	$712,960.00	Direct Labor hours	111400	$6.40	41400	$264,960.00	70000	$448,000.00
Batch Setups	$504,000.00	Setups	420	$1,200.00	230	$276,000.00	190	$228,000.00
Product sustaining	$740,000.00	Number of products	2	$370,000.00	1	$370,000.00	1	$370,000.00
Other	$48,240.00	No allocation
Total	$2,005,200.00					$910,960.00		$1,046,000.00
No. of units						23000		70000
Allocated overhead per unit						$39.6070		$14.9429

Computation of Product Margin
Particulars	Xtreme	Pathfinder	Total
Selling price per unit	$124.00	$88.00
Direct material per unit	$63.40	$53.00
Direct labor per unit	$14.40	$8.00
Allocated Manufacturing overhead cost per unit	$39.6070	$14.9429
Product Margin per unit	$6.5930	$12.0571
No. of units sold	23000	70000
Total Margin (Product margin per unit * No. of unit sold)	$151,640.00	$844,000.00	$995,640.00

Quantity comparison of traditional cost assignment
Particulars	Xtreme		Pathfinder		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount	% of total Amount
Direct Material Cost	$1,458,200.00	57.53%	$3,710,000.00	67.09%	$5,168,200.00	64.09%
Direct Labor Cost	$331,200.00	13.07%	$560,000.00	10.13%	$891,200.00	11.05%
Manufacturing Overhead cost	$745,200.00	29.40%	$1,260,000.00	22.78%	$2,005,200.00	24.86%
Total	$2,534,600.00		$5,530,000.00		$8,064,600.00

Quantity comparison of Activity Based cost assignment
Particulars	Xtreme		Pathfinder		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount	% of total Amount
Direct Cost:
Material Cost	$1,458,200.00	54.00%	$3,710,000.00	69.79%	$5,168,200.00	64.47%
Labor Cost	$331,200.00	12.27%	$560,000.00	10.53%	$891,200.00	11.12%
Indirect Cost:
Supporting direct labor cost	$264,960.00	9.81%	$448,000.00	8.43%	$712,960.00	8.89%
Batch Setups	$276,000.00	10.22%	$228,000.00	4.29%	$504,000.00	6.29%
Product sustaining	$370,000.00	13.70%	$370,000.00	6.96%	$740,000.00	9.23%
Total Cost Assigned to Products	$2,700,360.00		$5,316,000.00		$8,016,360.00
Cost not assigned to products					$48,240.00
Total Cost					$8,064,600.00