Question

Smoky Mountain Corporation makes two types of hiking boots—Xtreme and the Pathfinder. Data concerning these two product lines appear below:

	Xtreme			Pathfinder
Selling price per unit	$	140.00			$	99.00
Direct materials per unit	$	72.00			$	53.00
Direct labor per unit	$	24.00			$	12.00
Direct labor-hours per unit		2.0	DLHs			1.0	DLHs
Estimated annual production and sales		20,000	units			80,000	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	$	1,980,000
Estimated total direct labor-hours		120,000		DLHs

Required:

1. Compute the product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system. (Round your intermediate calculations to 2 decimal places.)

  

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				Activity
Activities and Activity Measures	Overhead Cost					Xtreme			Pathfinder			Total
Supporting direct labor (direct labor-hours)	$	783,600				40,000			80,000			120,000
Batch setups (setups)		495,000				200			100			300
Product sustaining (number of products)		602,400				1			1			2
Other		99,000				NA			NA			NA
Total manufacturing overhead cost	$	1,980,000

Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system. (Negative product margins should be indicated with a minus sign. Round your intermediate calculations to 2 decimal places.)

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Do not round intermediate calculations. Round your "Percentage" answers to 1 decimal place. (i.e. .1234 should be entered as 12.3))

Answer 1

Overhead Rate as per Traditional costing =$1,980,000 / 120,000 =$16.50 per hour
Computation of Product Margin
	Xtreme	Pathfinder	Total
Selling price per unit	$                     140.00	$                                      99.00
Direct material per unit	$                       72.00	$                                      53.00
Direct labor per unit	$                       24.00	$                                      12.00
Overhead Cost per unit	$                       33.00	$                                      16.50
Product margin per unit	$                       11.00	$                                      17.50
Production	20000	80000
Total Product Margin	$                  2,20,000	$                               14,00,000	$                           16,20,000
Computation of ABC rate
Activity	OH Costs(Col 1)	No. of activity base(Col 2)	Activity Rate(Col 1 / Col 2)
Supporting Direct labor	$                  7,83,600	1,20,000	$                                    6.53	per labor hrs.
Batch setups	$                  4,95,000	300	$                             1,650.00	per setups
Product Sustaining	$                  6,02,400	2	$                        3,01,200.00	per product
Total Cost	$                18,81,000
	Xtreme	Pathfinder
	Activity Based usage	Activity Based usage*ABC rate	Activity Based usage	Activity Based usage*ABC rate
Supporting Direct labor	40000	$                            2,61,200.00	80000	$                           5,22,400.00
Batch setups	200	$                            3,30,000.00	100	$                           1,65,000.00
Product Sustaining	1	$                            3,01,200.00	1	$                           3,01,200.00
Total Overhead Cost allocated		$                            8,92,400.00		$                           9,88,600.00
Production		20000		80000
Overhead Cost per unit		$                                      44.62	per unit	$                                     12.36
Computation of Product Margin
	Xtreme	Pathfinder	Total
Selling price per unit	$                     140.00	$                                      99.00
Direct material per unit	$                       72.00	$                                      53.00
Direct labor per unit	$                       24.00	$                                      12.00
Overhead Cost per unit	$                       44.62	$                                      12.36
Product margin per unit	$                       -0.62	$                                      21.64
Production	20000	80000
Total Product Margin	$                   -12,400	$                               17,31,400	$                           17,08,500
Note:Other Cost of $99,000 has not been considered when calculating the margin of product
	Xtreme	Pathfinder	Total
	Amount	% of Total amount	Amount	% of Total amount	Amount
Traditional Costing System
Direct Materials	$           14,40,000.00	55.8%	$                      42,40,000.00	65.0%	$           56,80,000.00
Direct labor	$             4,80,000.00	18.6%	$                        9,60,000.00	14.7%	$           14,40,000.00
Overhead Costs	$             6,60,000.00	25.6%	$                      13,20,000.00	20.2%	$           19,80,000.00
Total Costs assigned to products	$           25,80,000.00	100.0%	$                      65,20,000.00	100.0%	$           91,00,000.00
Activity-Based Costing System
Direct Costs:
Direct Materials	$           14,40,000.00	51.2%	$                      42,40,000.00	68.5%	$           56,80,000.00
Direct labor	$             4,80,000.00	17.1%	$                        9,60,000.00	15.5%	$           14,40,000.00
Indirect Costs:
Supporting Direct labor	$             2,61,200.00	9.3%	$                        5,22,400.00	8.4%	$             7,83,600.00
Batch setups	$             3,30,000.00	11.7%	$                        1,65,000.00	2.7%	ekkarill92 Next > < Previous Related Solutions Smoky Mountain Corporation makes two types of hiking boots—the Xtreme and the Pathfinder. Data concerning these... 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... Smoky Mountain Corporation makes two types of hiking boots—the Xtreme and the Pathfinder. Data concerning these... Smoky Mountain Corporation makes two types of hiking boots—the Xtreme and the Pathfinder. 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