Question

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 $ 138.00 $ 90.00
Direct materials per unit $ 64.40 $ 51.00
Direct labor per unit $ 13.50 $ 9.00
Direct labor-hours per unit 1.5 DLHs 1.0 DLHs
Estimated annual production and sales 22,000 units 73,000 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 $ 2,438,000
Estimated total direct labor-hours 106,000 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) $ 646,600 33,000 73,000 106,000
Batch setups (setups) 969,000 330 240 570
Product sustaining (number of products) 780,000 1 1 2
Other 42,400 NA NA NA
Total manufacturing overhead cost $ 2,438,000

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.

Solutions

Expert Solution

Solution 1:

Overhead Allocation - Traditional Costing System
Particulars Xtreme Pathfinder Total
Estimated annual Production (In units) 22000 73000
Direct Labour Hours Per unit 1.5 1
Total Direct Labour Hours 33000 73000 106000
Overhead Cost Allocation basis direct labour hours (Overhead / Total hours * Labor hours of model) $7,59,000.00 $16,79,000.00 $24,38,000.00
Manufacturing overhead cost per unit (Allocated Overhead / Nos of units) $34.50 $23.00
Computation of Product Margin - Traditional Costing System
Particulars Xtreme Pathfinder Total
Selling price per unit $138.00 $90.00
Direct material per unit $64.40 $51.00
Direct labor per unit $13.50 $9.00
Manufacturing overhead cost per unit $34.50 $23.00
Product Margin per unit $25.60 $7.00
Nos of units sold 22000 73000
Total Margin (Product margin per unit * Nos of unit sold) $5,63,200.00 $5,11,000.00 $10,74,200.00

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 $6,46,600.00 Direct Labor hours 106000 $6.10 33000 $2,01,300.00 73000 $4,45,300.00
Batch Setups $9,69,000.00 Setups 570 $1,700.00 330 $5,61,000.00 240 $4,08,000.00
Product sustaining $7,80,000.00 Number of products 2 $3,90,000.00 1 $3,90,000.00 1 $3,90,000.00
Other $42,400.00 No allocation
Total $24,38,000.00 $11,52,300.00 $12,43,300.00
Nos of units 22000 73000
Allocated overhead per unit $52.38 $17.03
Computation of Product Margin - Activity based Costing System
Particulars Xtreme Pathfinder Total
Selling price per unit $138.00 $90.00
Direct material per unit $64.40 $51.00
Direct labor per unit $13.50 $9.00
Allocated Manufacturing overhead cost per unit $52.38 $17.03
Product Margin per unit $7.72 $12.97
Nos of units sold 22000 73000
Total Margin (Product margin per unit * Nos of unit sold) $1,69,900.00 $9,46,700.00 $11,16,600.00

Solution 3:

Quantity comparison of traditional cost assignment
Particulars Xtreme Pathfinder Total
Amount % of total Amount Amount % of total Amount Amount
Direct Material Cost $14,16,800.00 27.57% $37,23,000.00 72.43% $51,39,800.00
Direct Labor Cost $2,97,000.00 31.13% $6,57,000.00 68.87% $9,54,000.00
Manufacturing Overhead cost $7,59,000.00 31.13% $16,79,000.00 68.87% $24,38,000.00
Total Cost assigned to Product $24,72,800.00 $60,59,000.00 $85,31,800.00
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 $14,16,800.00 27.57% $37,23,000.00 72.43% $51,39,800.00
Direct Labor Cost $2,97,000.00 31.13% $6,57,000.00 68.87% $9,54,000.00
Indirect Cost:
Supporting direct labor cost $2,01,300.00 31.13% $4,45,300.00 68.87% $6,46,600.00
Batch Setups $5,61,000.00 57.89% $4,08,000.00 42.11% $9,69,000.00
Product sustaining $3,90,000.00 50.00% $3,90,000.00 50.00% $7,80,000.00
Total Cost Assigned to Products $28,66,100.00 $56,23,300.00 $84,89,400.00
Cost not assigned to products:
Others $42,400.00
Total Cost $85,31,800.00

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