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In: Accounting

Smoky Mountain Corporation makes two types of hiking boots—the Xtreme and the Pathfinder. Data concerning these...

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 $ 120.00 $ 87.00
Direct materials per unit $ 63.30 $ 52.00
Direct labor per unit $ 17.00 $ 10.00
Direct labor-hours per unit 1.7 DLHs 1.0 DLHs
Estimated annual production and sales 22,000 units 76,000 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 $ 1,927,800
Estimated total direct labor-hours 113,400 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) $ 703,080 37,400 76,000 113,400
Batch setups (setups) 480,000 220 180 400
Product sustaining (number of products) 700,000 1 1 2
Other 44,720 NA NA NA
Total manufacturing overhead cost $ 1,927,800

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.

repare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answers to 1 decimal place.)

Xtreme Pathfinder Total
% of % of
Amount Total Amount Amount Total Amount Amount
Traditional Cost System
Direct materials % %
Direct labor % %
Manufacturing overhead % %
Total cost assigned to products $0 $0 $0
Xtreme Pathfinder Total
% of % of
Amount Total Amount Amount Total Amount Amount
Activity-Based Costing System
Direct costs:
Direct materials % %
Direct labor % %
Indirect costs:
Supporting direct labor % %
Batch setups % %
Product sustaining % %
Total cost assigned to products $0 $0 $0
Costs not assigned to products:
Other
Total cost $0

Solutions

Expert Solution

1. The Margin calculated as per Traditional Costing is 9% for Xtreme and 9.195% for Pathfinder

2. The Margin Calculated as per Activity Based Costing is 7.5% for Xtreme and 9.79% for Pathfinder

3. The comparative Statement prepared is attached herewith

Assumption : Cost stated as Other in Manufacturing Overheads is considered in all calculation, since it was a part of Manufacturing Overhead it is advised to use that cost while calculate the Margins of Each product separately. Since here no basis was given to allocate such cost, it was allocated equally in Pathfinder and Xtreme


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