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 $ 65.20 $ 51.00 Direct labor per unit $ 11.20 $ 8.00 Direct labor-hours per unit 1.4 DLHs 1.0 DLHs Estimated annual production and sales 30,000 units 65,000 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 $ 2,033,000 Estimated total direct labor-hours 107,000 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): Estimated Overhead Cost Expected Activity Activities and Activity Measures Xtreme Pathfinder Total Supporting direct labor (direct labor-hours) $ 631,300 42,000 65,000 107,000 Batch setups (setups) 876,000 410 320 730 Product sustaining (number of products) 460,000 1 1 2 Other 65,700 NA NA NA Total manufacturing overhead cost $ 2,033,000 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)	overhead rate
	estimated MOH/estimated DLH's
	2,033,000/107000
	19	per direct labor hour
	product margin
				Xtreme	pathfinder	total
	sales			3600000	5655000
	less:Expense
	Direct materials			1956000	3315000
	Direct labor			336000	520000
	overhead			798000	1235000
	total cost			3090000	5070000
	product margin			510000	585000	1095000
				Xtreme	pathfinder	total
	product margin			510000	585000	1095000	answer
2)	overhead rate					oh rate
				amount	driver
	Activity
	Supporting direct labor			631,300	107,000	5.9
	batch setups			876,000	730	1200
	product sustaining			460,000	2	230000
	allocation of overhead and per unit cost
				Xtremet		Pathfinder
			Rate	driver	OH	Rate	Driver	OH
	Activity
	Supporting direct labor		5.9	42,000	247800	5.9	65,000	383500
	batch setups		1200	410	492000	1200	320	384000
	product sustaining		230000	1	230000	230000	1	230000
	total overhead				969800			997500
	product margin
				Xtreme	pathfinder	total
	Selling price per unit			3600000	5655000
	less:Expense
	Direct materials			1956000	3315000
	Direct labor			336000	520000
	total overhead			969800	997500	1967300
	total cost			3261800.00	4832500.00
	product margin			338200.00	822500.00	1160700.00
				Xtreme	pathfinder	total
	product margin			338200	822500	1160700	answer
	3)			Xtreme		Pathfinder		total
					% of		% of
				Amount	total amount	Amount	total amount	Amount
	Traditional Cost system
	Direct materials			1956000	37.1%	3315000	62.9%	5271000
	direct labor			336000	39.3%	520000	60.7%	856000
	manufacturing overhead			798000	39.3%	1235000	60.7%	2033000
	total cost assigned to produts			3090000		5070000		8160000
				Xtreme		Pathfinder		total
					% of		% of
				Amount	total amount	Amount	total amount	Amount
	Activity based
	Direct materials			1956000	37.1%	3315000	62.9%	5271000
	direct labor			336000	39.3%	520000	60.7%	856000
	indirect costs
	Supporting direct labor			247800	39.3%	383500	60.7%	631300
	batch setups			492000	56.2%	384000	43.8%	876000
	product sustaining			230000	50.0%	230000	50.0%	460000
	total cost assigned to products			3261800		4832500		8094300
	costs not assigned to products
	other							65,700
	total cost.							8160000