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.

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.

Answer 1

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Predetermined Overhead Rate:	Manufacturing Overhead/Direct Labor Hours
	$2,020,000/$101,000
	$                                                                            20.00	per Direct Labor Hour
Requirement -1
		Xtreme	Pathfinder	Total
Sale Revenue	25,000*$121 and 71,000*$88	$       3,025,000	$       6,248,000	$        9,273,000
Less:
Direct Material	25,000*$64.70 and 71,000*$54	$       1,617,500	$       3,834,000	$        5,451,500
Direct Labor	25,000*$10.80 and 71,000*$9	$           270,000	$           639,000	$            909,000
Manufacturing Overheads	25,000*20*1.2 and 71,000*20*1	$           600,000	$       1,420,000	$        2,020,000
Product Gross Margin		$           537,500	$           355,000	$            892,500
Requirement -2
		Xtreme	Pathfinder	Total
Sale Revenue	25,000*$121 and 71,000*$88	$       3,025,000	$       6,248,000	$        9,273,000
Less:
Direct Material	25,000*$64.70 and 71,000*$54	$       1,617,500	$       3,834,000	$        5,451,500
Direct Labor	25,000*$10.80 and 71,000*$9	$           270,000	$           639,000	$            909,000
Manufacturing Overheads		$           926,000	$       1,073,000	$        1,999,000
Product Gross Margin		$           211,500	$           702,000	$            913,500
Working for Overhead allocation:
				Xtreme		Pathfinder
Acticity Cost Pool	Manufacturing overhead	Total Activity	Activity Rate	no of Activities	Overhead Allocated	no of Activities	Overhead Allocated
	A	B	A/B=C	D	D*C	E	E*C
Supporing Direct Labors	$                                                                       606,000	101000	$                    6.0	30000	$                      180,000	71000	$                      426,000
Batch Setups	$                                                                       693,000	630	$            1,100.0	360	$                      396,000	270	$                      297,000
Product Sustaining	$                                                                       700,000	2	$       350,000.0	1	$                      350,000	1	$                      350,000
Total	$                                                                   1,999,000				$                      926,000		$                   1,073,000
Requirement -3
Traditional:		Xtreme		Pathfinder		Total Amount
		Amount	%	Amount	%
Direct Material		$       1,617,500	65.03%	$        3,834,000	65.06%	$        5,451,500
Direct Labor		$           270,000	10.85%	$            639,000	10.84%	$            909,000
Manufacturing Overheads		$           600,000	24.12%	$        1,420,000	24.10%	$        2,020,000
Total Cost Assigned to product		$       2,487,500		$        5,893,000		$        8,380,500
Cost not assigned
Total Cost						$        8,380,500
Activity Based:
		Xtreme		Pathfinder		Total Amount
		Amount	%	Amount	%
Direct Costs:
Direct Material		$       1,617,500	57.49%	$        3,834,000	69.13%	$        5,451,500
Direct Labor		$           270,000	9.60%	$            639,000	11.52%	$            909,000
Indirect Costs:
Supporing Direct Labors		$           180,000	6.40%	$            426,000	7.68%	$            606,000
Batch Setups		$           396,000	14.07%	$            297,000	5.36%	$            693,000
Product Sustaining		$           350,000	12.44%	$            350,000	6.31%	$            700,000
Total Cost Assigned to product		$       2,813,500		$        5,546,000		$        8,359,500
Cost not assigned
Manufacturing Overheads	Other from table given					$              21,000
Total Cost						$        8,380,500