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 $ 121.00 $ 88.00 Direct materials per unit $ 64.70 $ 54.00 Direct labor per unit $ 10.80 $ 9.00 Direct labor-hours per unit 1.2 DLHs 1.0 DLHs Estimated annual production and sales 25,000 units 71,000 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 $ 2,020,000 Estimated total direct labor-hours 101,000 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) $ 606,000 30,000 71,000 101,000 Batch setups (setups) 693,000 360 270 630 Product sustaining (number of products) 700,000 1 1 2 Other 21,000 NA NA NA Total manufacturing overhead cost $ 2,020,000 Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system.

Answer 1

Answer 1: Traditional Method

Estimated total manufacturing overhead	20,20,000
Estimated total direct labor-hours	1,01,000
Mfg. Overhead recovery rate	20
(Under Traditional Method)

	Xtreme	Pathfinder
Selling Price (A)	121.00	88.00
Costs:
Direct Material Cost	64.70	54.00
Direct Labour Cost	10.80	9.00
Mfg. Overhead @ 20 per DLH	24.00	20.00
Total Cost (B)	99.50	83.00
Product margin per unit (A) - (B)	21.50	5.00
Total Profit	5,37,500	3,55,000

Answer 2: Activity Based Costing

Nature of Overhead Cost	Amount of Overhead	Cost Driver	Qty of Cost Driver	Overhead Rate
Supporting Direct Labour	6,06,000	Direct Labour Hr	101000	6
Batch Setup	6,93,000	No. of Setups	630	1100
Product sustaining	7,00,000	No. of Products	2	350000
	19,99,000

		Xtreme		Pathfinder
Nature of Overhead Cost	Overhead Rate	Qty of Cost Driver	Overhead allocated	Qty of Cost Driver	Overhead allocated
Supporting Direct Labour	6	30000	180000	71000	426000
Batch Setup	1100	360	396000	270	297000
Product sustaining	350000	1	350000	1	350000
			926000		1073000
No of Units manufactured			25000		71000
Allocated Overhead Cost per unit			37.04		15.11

Calculation of Product Margin under Activity based costing

	Xtreme	Pathfinder
Selling Price (A)	121.00	88.00
Costs:
Direct Material Cost	64.70	54.00
Direct Labour Cost	10.80	9.00
Mfg. Overhead	37.04	15.11
Total Cost (B)	112.54	78.11
Product margin per unit (A) - (B)	8.46	9.89
Total Profit before Unallocated Exp.	2,11,500	7,02,000
Profit after reducing unallocated expense		8,92,500