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

1)	overhead rate
	estimated MOH/estimated DLH's
	2005200/111400
	18	per direct labor hour
	product margin
				Xtreme	pathfinder	total
	sales			2852000	6160000
	less:Expense
	Direct materials			1458200	3710000
	Direct labor			331200	560000
	overhead			745200	1260000
	total cost			2534600	5530000
	product margin			317400	630000	947400
				Xtreme	pathfinder	total
	product margin			317400	630000	947400	answer
2)	overhead rate					oh rate
				amount	driver
	Activity
	Supporting direct labor			712,960	111,400	6.4
	batch setups			504,000	420	1200
	product sustaining			740,000	2	370000
	allocation of overhead and per unit cost
				Xtremet		Pathfinder
			Rate	driver	OH	Rate	Driver	OH
	Activity
	Supporting direct labor		6.4	41,400	264960	6.4	70,000	448000
	batch setups		1200	230	276000	1200	190	228000
	product sustaining		370000	1	370000	370000	1	370000
	total overhead				910960			1046000
	product margin
				Xtreme	pathfinder	total
	Selling price per unit			2852000	6160000
	less:Expense
	Direct materials			1458200	3710000
	Direct labor			331200	560000
	total overhead			910960	1046000	1956960
	total cost			2700360.00	5316000.00
	product margin			151640.00	844000.00	995640.00
				Xtreme	pathfinder	total
	product margin			151640	844000	995640	answer
	3)			Xtreme		Pathfinder		total
					% of		% of
				Amount	total amount	Amount	total amount	Amount
	Traditional Cost system
	Direct materials			1458200	28.2%	3710000	71.8%	5168200
	direct labor			331200	37.2%	560000	62.8%	891200
	manufacturing overhead			745200	37.2%	1260000	62.8%	2005200
	total cost assigned to produts			2534600		5530000		8064600
				Xtreme		Pathfinder		total
					% of		% of
				Amount	total amount	Amount	total amount	Amount
	Activity based
	Direct materials			1458200	28.2%	3710000	71.8%	5168200
	direct labor			331200	37.2%	560000	62.8%	891200
	indirect costs
	Supporting direct labor			264960	37.2%	448000	62.8%	712960
	batch setups			276000	54.8%	228000	45.2%	504000
	product sustaining			370000	50.0%	370000	50.0%	740000
	total cost assigned to products			2700360		5316000		8016360
	costs not assigned to products
	other							48,240
	total cost.							8064600