Question

In: Accounting

Kragan Clothing Company manufactures its own designed and labeled athletic wear and sells its products through...

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

Solutions

Expert Solution

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.

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