Question

Smoky Mountain Corporation makes two types of hiking boots—Xtreme and the Pathfinder. Data concerning these two product lines appear below:

   

	Xtreme			Pathfinder
Selling price per unit	$	120.00		$	92.00
Direct materials per unit	$	63.50		$	54.00
Direct labor per unit	$	13.50		$	9.00
Direct labor-hours per unit		1.5	DLHs		1.0	DLHs
Estimated annual production and sales		24,000	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	$2,033,000
Estimated total direct labor-hours	107,000 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		Expected Activity
Activities and Activity Measures	Overhead Cost		Xtreme	Pathfinder	Total
Supporting direct labor (direct labor-hours)	$	663,400	36,000	71,000	107,000
Batch setups (setups)		572,000	240	200	440
Product sustaining (number of products)		750,000	1	1	2
Other		47,600	NA	NA	NA
Total manufacturing overhead cost	$	2,033,000

   

Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system. (Negative customer margins should be indicated with a minus sign. Round your intermediate calculations to 2 decimal places.)

         

3.	Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Do not round intermediate calculations. Round your "Percentage" answer to 1 decimal place. (i.e. .1234 should be entered as 12.3))

      

     

Answer 1

Solution 1:

Overhead Allocation - Traditional Costing System
Particulars	Xtreme	Pathfinder	Total
Estimated annual Production (In units)	24000	71000
Direct Labour Hours Per unit	1.5	1
Total Direct Labour Hours	36000	71000	107000
Overhead Cost Allocation basis direct labour hours (Overhead / Total hours * Labor hours of model)	$684,000.00	$1,349,000.00	$2,033,000.00
Manufacturing overhead cost per unit (Allocated Overhead / Nos of units)	$28.50	$19.00

Computation of Product Margin - Traditional Costing System
Particulars	Xtreme	Pathfinder	Total
Selling price per unit	$120.00	$92.00
Direct material per unit	$63.50	$54.00
Direct labor per unit	$13.50	$9.00
Manufacturing overhead cost per unit	$28.50	$19.00
Product Margin per unit	$14.50	$10.00
Nos of units sold	24000	71000
Total Margin (Product margin per unit * Nos of unit sold)	$348,000.00	$710,000.00	$1,058,000.00

Solution 2:

Determination of activity rate for each activity & allocation of overhead
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Xtreme		Pathfinder
					Usage	Allocated Costs	Usage	Allocated Costs
Supporting direct labor cost	$663,400.00	Direct Labor hours	107000	$6.20	36000	$223,200.00	71000	$440,200.00
Batch Setups	$572,000.00	Setups	440	$1,300.00	240	$312,000.00	200	$260,000.00
Product sustaining	$750,000.00	Number of products	2	$375,000.00	1	$375,000.00	1	$375,000.00
Other	$47,600.00	No allocation
Total	$2,033,000.00					$910,200.00		$1,075,200.00
Nos of units						24000		71000
Allocated overhead per unit						$37.93		$15.14

Computation of Product Margin - Activity based Costing System
Particulars	Xtreme	Pathfinder	Total
Selling price per unit	$120.00	$92.00
Direct material per unit	$63.50	$54.00
Direct labor per unit	$13.50	$9.00
Allocated Manufacturing overhead cost per unit	$37.93	$15.14
Product Margin per unit	$5.07	$13.86
Nos of units sold	24000	71000
Total Margin (Product margin per unit * Nos of unit sold)	$121,680.00	$984,060.00	$1,105,740.00

Solution 3:

Quantity comparison of traditional cost assignment
Particulars	Xtreme		Pathfinder		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Material Cost	$1,524,000.00	28.4%	$3,834,000.00	71.6%	$5,358,000.00
Direct Labor Cost	$324,000.00	33.6%	$639,000.00	66.4%	$963,000.00
Manufacturing Overhead cost	$684,000.00	33.6%	$1,349,000.00	66.4%	$2,033,000.00
Total	$2,532,000.00		$5,822,000.00		$8,354,000.00

Quantity comparison of Activity Based cost assignment
Particulars	Xtreme		Pathfinder		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Cost:
Direct Material Cost	$1,524,000.00	28.4%	$3,834,000.00	71.6%	$5,358,000.00
Direct Labor Cost	$324,000.00	33.6%	$639,000.00	66.4%	$963,000.00
Indirect Cost:
Supporting direct labor cost	$223,200.00	33.6%	$440,200.00	66.4%	$663,400.00
Batch Setups	$312,000.00	54.5%	$260,000.00	45.5%	$572,000.00
Product sustaining	$375,000.00	50.0%	$375,000.00	50.0%	$750,000.00
Total Cost Assigned to Products	$2,758,200.00		$5,548,200.00		$8,306,400.00
Cost not assigned to products					$25,680.00
Total Cost					$8,332,080.00