Question

Kragan Clothing Company manufactures its own designed and labeled athletic wear and sells its products through catalog sales and retail outlets. While Kragan has for years used activity-based costing in its manufacturing activities, it has always used traditional costing in assigning its selling costs to its product lines. Selling costs have traditionally been assigned to Kragan’s product lines at a rate of 70% of direct materials costs. Its direct materials costs for the month of March for Kragan’s “high-intensity” line of athletic wear are $405,000. The company has decided to extend activity-based costing to its selling costs. Data relating to the “high-intensity” line of products for the month of March are as follows.

Activity Cost Pools		Cost Drivers		Overhead Rate			Number of Cost Drivers Used per Activity
Sales commissions		Dollar sales		$0.05	per dollar sales		$936,000
Advertising—TV		Minutes		$300	per minute		280
Advertising—Internet		Column inches		$10	per column inch		2,200
Catalogs		Catalogs mailed		$2.50	per catalog		63,800
Cost of catalog sales		Catalog orders		$1	per catalog order		8,800
Credit and collection		Dollar sales		$0.03	per dollar sales		936,000

Compute the selling costs to be assigned to the “high-intensity” line of athletic wear for the month of March (1) using the traditional product costing system (direct materials cost is the cost driver), and (2) using activity-based costing.

		Traditional product costing		Activity-based costing
Selling cost to be assigned		$		$

By what amount does the traditional product costing system undercost or overcost the “high-intensity” product line?

$

OvercostUndercost

Answer 1

Selling cost assigned to the “high-intensity” line of athletic wear using Traditional product costing
Selling cost assigned = 70% of direct material cost for March = 70% x $4,05,000 = $2,83,500
Selling cost assigned to the “high-intensity” line of athletic wear using ABC based costing
Activity cost pool	Overhead rate		Number of Cost Drivers Used per Activity	Selling cost assigned
a	b		c	b x c
Sales Commissions	$0.05	per dollar sales	$936,000.00	$46,800.00
Advertising - TV	$300.00	per minute	280	$84,000.00
Advertising - Internet	$10.00	per column inch	2200	$22,000.00
Catalogs	$2.50	per catalog	63800	$159,500.00
Cost of Catalog Sales	$1.00	per catalog order	8800	$8,800.00
Credit and Collection	$0.03	per dollar sales	$936,000.00	$28,080.00
Selling cost assigned				$349,180.00
		Traditional product costing	Activity-based costing
Selling cost to be assigned		$283,500.00	$349,180.00
The traditional product costing system undercost by $65,680 the “high-intensity” product line.