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	$	120.00		$	87.00
Direct materials per unit	$	63.30		$	52.00
Direct labor per unit	$	17.00		$	10.00
Direct labor-hours per unit		1.7	DLHs		1.0	DLHs
Estimated annual production and sales		22,000	units		76,000	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 Overhead Cost			Expected Activity
Activities and Activity Measures				Xtreme	Pathfinder	Total
Supporting direct labor (direct labor-hours)	$	703,080		37,400	76,000	113,400
Batch setups (setups)		480,000		220	180	400
Product sustaining (number of products)		700,000		1	1	2
Other		44,720		NA	NA	NA
Total manufacturing overhead cost	$	1,927,800

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.

Estimated total manufacturing overhead	$	1,927,800
Estimated total direct labor-hours		113,400	DLHs

Answer 1

1	Product margin for the X treme and the Pathfinder products under the Traditional costing system
	X treme	Pathfinder	Total
Sales		2640000		6612000		9252000
Cost of goods sold
Direct Materials	1392600		3952000		5344600
Direct labor	374000		760000		1134000
Manufacturing overhead	635800	2402400	1292000	6004000	1927800	8406400
Product Margin		237600		608000		845600
Plantwide overhead rate=Total estimated manufacturing overhead/Total estimated direct labor-hours
	17	per labor hour
2	Product margin for the X treme and the Pathfinder products under the Activity - based costing system
	Calculate the overhead assigned using ABC method:
	Activity Cost Pools	X treme	Pathfinder	total
	supporting		231880		471200	703080
	batch setups		264000		216000	480000
	product sustaining		350000		350000	700000
	total assigned cost		845880		1037200	1883080
	not assigned cost		0		0	44720
	Total overhead assigned cost		845880		1037200	1927800
		X treme	Pathfinder
	sales		2640000		6612000
	Direct Materials	1392600		3952000
	Direct labor	374000		760000
	supporting	231880		471200
	batch setups	264000		216000
	product sustaining	350000		350000
	total cost		2612480		5749200
	product margin		27520		862800
3	comparision between traditional and activity based costing system
		X treme	Pathfinder
	product margin-traditional		237600		608000
	product margin-ABC		27520		862800
	Change in reported product margins		210080		-254800