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	$	132.00		$	94.00
Direct materials per unit	$	64.60		$	53.00
Direct labor per unit	$	9.60		$	8.00
Direct labor-hours per unit		1.2	DLHs		1.0	DLHs
Estimated annual production and sales		24,000	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	$	2,470,000
Estimated total direct labor-hours		98,800	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)	$	642,200		28,800	70,000	98,800
Batch setups (setups)		915,000		350	260	610
Product sustaining (number of products)		840,000		1	1	2
Other		72,800		NA	NA	NA
Total manufacturing overhead cost	$	2,470,000

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

Part 1 –

Product Margin Under Traditional Costing
	Xtreme	Pathfinder
Unit Selling Price	$132.00	$94.00
Unit Product Cost
Direct Material Cost	$64.60	$53.00
Direct labor	$9.60	$8.00
Applied Manufacturing Overhead (Refer Note 1)	$30.00	$25.00
Total Product Cost	$104.20	$86.00
Unit Product Margin	$27.80	$8.00
Note 1 -
Total Manufacturing Overheads	$2,470,000
Divided by: Direct labor dollars (Total)	$98,800
Overhead Rate per Direct labor hour	$25.00	per direct labor hour
Applied Manufacturing Overheads	Xtreme	Pathfinder
Required Direct Labor hour per unit	$1.20	$1.00
x Overhead Rate per direct labor hour	$25.00	$25.00
Applied Manufacturing Overheads	$30.00	$25.00

Part 2 –

Product Margin Under Activity Based Costing System
	Xtreme	Pathfinder
Unit Selling Price	$132.00	$94.00
Product Cost
Direct Material Cost	$64.60	$53.00
Direct labor	$9.60	$8.00
Applied Manufacturing Overhead (Refer Note 2)	$47.18	$18.07
Total Product Cost	$121.38	$79.07
Unit Product Margin (Sales Value - Product Cost)	$10.63	$14.93

Note 2 –

						Xtreme	Pathfinder
Activity Cost Pool	Expected Overhead Costs (A)	Total Expected Activity (B)	Overhead Rate per Unit of Activity (C = A/B)	Activity Driver USAGE (H)	Overhead Assigned (C*H)	Activity Driver USAGE (E)	Overhead Assigned (C*E)
Supporting	$642,200	98800	direct labor hours	$6.50	per direct labor hour	28800	$187,200	70000	$455,000
Batch Setup	$915,000	610	Setup hours	$1,500.00	per setup hour	350	$525,000	260	$390,000
Product Sustaining	$840,000	2	Products	$420,000.00	per product	1	$420,000	1	$420,000
Other	$72,800					0	$0		$0
Total Overhead Assigned (O)	$2,470,000						$1,132,200		$1,265,000
Divide by: Number of Units							24,000		70,000
Applied Overhead Per Unit							$47.18		$18.07

Part 3 –

Quantitative Comparision of Traditional and Activity Based Cost assignments
	Xtreme	Pathfinder	Total Amount
Amount	% of Total Amount	Amount	% of Total Amount
Traditional Cost System
Direct materials	$1,550,400	29.47%	$3,710,000	70.53%	$5,260,400
Direct Labor	$230,400	29.15%	$560,000	70.85%	$790,400
Manufacturing Overhead	$720,000	29.15%	$1,750,000	70.85%	$2,470,000
Total Cost assigned to products	$2,500,800	29.35%	$6,020,000	70.65%	$8,520,800
Activity Based Costing System
Direct Costs:
Direct materials	$1,550,400	29.47%	$3,710,000	70.53%	$5,260,400
Direct Labor	$230,400	29.15%	$560,000	70.85%	$790,400
Indirect Costs:
Supporting	$187,200	29.15%	$455,000	70.85%	$642,200
Batch Setup	$525,000	57.38%	$390,000	42.62%	$915,000
Product Sustaining	$420,000	50.00%	$420,000	50.00%	$840,000
Total Cost assigned to products	$2,913,000	34.48%	$5,535,000	65.52%	$8,448,000
Costs not assigned to products
Other					$72,800
Total Cost					$8,520,800

Hope the above calculations, working and explanations are clear to you and help you to understand the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Answer 2

1)	overhead rate
	estimated MOH/estimated DLH's
	2,470,000/98,800
	25
	product margin
				Xtreme	pathfinder	total
	Selling price per unit			132	94
	less:Expense
	Direct materials per unit			64.6	53
	Direct labor per unit			9.6	8
	overhead pu (oh rate*DLH's pu)			30	25
	total unit cost			104.2	86
	product margin per unit			27.8	8	35.8
				Xtreme	pathfinder	total
	product margin			667200	560000	1227200	answer
2)	overhead rate					oh rate
				amount	driver
	Activity
	Supporting direct labor			642,200	98,800	6.5
	batch setups			915,000	610	1500
	product sustaining			840,000	2	420000
	allocation of overhead and per unit cost
				Xtremet		Pathfinder
			Rate	driver	OH	Rate	Driver	OH
	Activity
	Supporting direct labor		6.5	28,800	187200	6.5	70,000	455000
	batch setups		1500	350	525000	1500	260	390000
	product sustaining		420000	1	420000	420000	1	420000
	total overhead				1132200			1265000
	total production				24,000			70,000
	overhead per unit				47.18			18.07
	product margin
				Xtreme	pathfinder	total
	Selling price per unit			132	94
	less:Expense
	Direct materials per unit			64.6	53
	Direct labor per unit			9.6	8
	overhead pu (oh rate*DLH's pu)			47.18	18.07
	total unit cost			121.38	79.07
	product margin			10.63	14.93	25.55
				Xtreme	pathfinder	total
	product margin			255000	1045000	1300000	answer
	3)			Xtreme		Pathfinder		total
					% of		% of
				Amount	total amount	Amount	total amount	Amount
	Traditional Cost system
	Direct materials			1550400	29.5%	3710000	70.5%	5260400
	direct labor			230400	29.1%	560000	70.9%	790400
	manufacturing overhead			720000	29.1%	1750000	70.9%	2470000
	total cost assigned to produts			2500800		6020000		8520800
				Xtreme		Pathfinder		total
					% of		% of
				Amount	total amount	Amount	total amount	Amount
	Activity based
	Direct materials			1550400	29.5%	3710000	70.5%	5260400
	direct labor			230400	29.1%	560000	70.9%	790400
	indirect costs
	Supporting direct labor			187200	29.1%	455000	70.9%	642200
	batch setups			525000	57.4%	390000	42.6%	915000
	product sustaining			420000	50.0%	420000	50.0%	840000
	total cost assigned to products			2913000		5535000		8448000
	costs not assigned to products
	other							72,800
	total cost.							8520800