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	$	115.00		$	85.00
Direct materials per unit	$	63.90		$	51.00
Direct labor per unit	$	12.00		$	10.00
Direct labor-hours per unit		1.2	DLHs		1.0	DLHs
Estimated annual production and sales		28,000	units		75,000	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	$	2,063,400
Estimated total direct labor-hours		108,600	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)	$	673,320		33,600	75,000	108,600
Batch setups (setups)		520,000		280	240	520
Product sustaining (number of products)		790,000		1	1	2
Other		80,080		NA	NA	NA
Total manufacturing overhead cost	$	2,063,400

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.

Complete this question by entering your answers in the tabs below.

Required 1

Required 2

Required 3

Compute the product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system. (Round your intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)

	Xtreme Pathfinder Total Product margin

Required 3

Compute the product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system. (Round your intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)

Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places.)

	Xtreme Pathfinder Total % of % of Amount Total Amount Amount Total Amount Amount Traditional Cost System % % % % % % Total cost assigned to products Xtreme Pathfinder Total % of % of Amount Total Amount Amount Total Amount Amount Activity-Based Costing System Direct costs: % % % % Indirect costs: % % % % % % Total cost assigned to products Costs not assigned to products: Total cost

	Xtreme Pathfinder Total

Answer 1

Solution 1:

Overhead Allocation - Traditional Costing System
Particulars	Xtreme	Pathfinder	Total
Estimated annual Production (In units)	28000	75000
Direct Labour Hours Per unit	1.2	1
Total Direct Labour Hours	33600	75000	108600
Overhead Cost Allocation basis direct labour hours (Overhead / Total hours * Labor hours of model)	$638,400.00	$1,425,000.00	$2,063,400.00
Manufacturing overhead cost per unit (Allocated Overhead / Nos of units)	$22.80	$19.00

Computation of Product Margin - Traditional Costing System
Particulars	Xtreme	Pathfinder	Total
Selling price per unit	$115.00	$85.00
Direct material per unit	$63.90	$51.00
Direct labor per unit	$12.00	$10.00
Manufacturing overhead cost per unit	$22.80	$19.00
Product Margin per unit	$16.30	$5.00
Nos of units sold	28000	75000
Total Margin (Product margin per unit * Nos of unit sold)	$456,400.00	$375,000.00	$831,400.00

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	$673,320.00	Direct Labor hours	108600	$6.20	33600	$208,320.00	75000	$465,000.00
Batch Setups	$520,000.00	Setups	520	$1,000.00	280	$280,000.00	240	$240,000.00
Product sustaining	$790,000.00	Number of products	2	$395,000.00	1	$395,000.00	1	$395,000.00
Other	$80,080.00	No allocation
Total	$2,063,400.00					$883,320.00		$1,100,000.00
Nos of units						28000		75000
Allocated overhead per unit						$31.55		$14.67

Computation of Product Margin - Activity based Costing System
Particulars	Xtreme	Pathfinder	Total
Selling price per unit	$115.00	$85.00
Direct material per unit	$63.90	$51.00
Direct labor per unit	$12.00	$10.00
Allocated Manufacturing overhead cost per unit	$31.55	$14.67
Product Margin per unit	$7.55	$9.33
Nos of units sold	28000	75000
Total Margin (Product margin per unit * Nos of unit sold)	$211,480.00	$700,000.00	$911,480.00

Solution 3:

Quantity comparison of traditional cost assignment
Particulars	Xtreme		Pathfinder		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Material Cost	$1,789,200.00	31.87%	$3,825,000.00	68.13%	$5,614,200.00
Direct Labor Cost	$336,000.00	30.94%	$750,000.00	69.06%	$1,086,000.00
Manufacturing Overhead cost	$638,400.00	30.94%	$1,425,000.00	69.06%	$2,063,400.00
Total Cost assigned to Product	$2,763,600.00		$6,000,000.00		$8,763,600.00

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	$1,789,200.00	31.87%	$3,825,000.00	68.13%	$5,614,200.00
Direct Labor Cost	$336,000.00	30.94%	$750,000.00	69.06%	$1,086,000.00
Indirect Cost:
Supporting direct labor cost	$208,320.00	30.94%	$465,000.00	69.06%	$673,320.00
Batch Setups	$280,000.00	53.85%	$240,000.00	46.15%	$520,000.00
Product sustaining	$395,000.00	50.00%	$395,000.00	50.00%	$790,000.00
Total Cost Assigned to Products	$3,008,520.00		$5,675,000.00		$8,683,520.00
Cost not assigned to products:
Others					$80,080.00
Total Cost					$8,763,600.00