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	$	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 Overhead Cost			Expected Activity
Activities and Activity Measures				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

************BOLD ANSWERS ARE INCORRECT EVERYTHING ELSE IS CORRECT**************

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 $186,000 $710,000 $896,000

Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system. (Round your intermediate calculations to 2 decimal places.)

	Xtreme Pathfinder Total Product margin $(64,000) $960,000 $896,000

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

Prepare 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 $1,524,000 57.0 % $3,834,000 66.0 % $5,358,000 Direct labor 486,000 18.0 % 639,000 11.0 % 1,125,000 Manufacturing overhead 684,000 25.0 % 1,349,000 23.0 % 2,033,000 Total cost assigned to products $2,694,000 $5,822,000 $8,516,000 Xtreme Pathfinder Total % of % of Amount Total Amount Amount Total Amount Amount Activity-Based Costing System Direct costs: Direct materials $1,524,000 52.0 % $3,834,000 69.0 % $5,358,000 Direct labor 486,000 17.0 % 639,000 11.0 % 1,125,000 Indirect costs: Supporting direct labor 223,200 8.0 % 440,200 8.0 % 663,400 Batch setups 312,000 11.0 % 260,000 5.0 % 572,000 Product sustaining 375,000 13.0 % 375,000 7.0 % 750,000 Total cost assigned to products $2,920,200 $5,548,200 $8,468,400 Costs not assigned to products: Other 47,600 Total cost $8,516,000

Answer 1

1.

Overhead rate = 2033000/107000 = $19 per hour

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 (Direct labor hours per unit* $19)	$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)	$3,48,000	$7,10,000	$10,58,000

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	$6,63,400.00	Direct Labor hours	107000	$6.20	36000	$2,23,200.00	71000	$4,40,200.00
Batch Setups	$5,72,000.00	Setups	440	$1,300.00	240	$3,12,000.00	200	$2,60,000.00
Product sustaining	$7,50,000.00	Number of products	2	$3,75,000.00	1	$3,75,000.00	1	$3,75,000.00
Other	$47,600.00	No allocation
Total	$20,33,000.00					$9,10,200.00		$10,75,200.00
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	$5.08	$13.86
Nos of units sold	24000	71000
Total Margin (Product margin per unit * Nos of unit sold)	$1,21,800	$9,83,800	$11,05,600

3.

Quantity comparison of traditional cost assignment
Particulars	Xtreme	Pathfinder	Total
Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Material Cost	$15,24,000.00	28.44%	$38,34,000.00	71.56%	$53,58,000.00
Direct Labor Cost	$3,24,000.00	33.64%	$6,39,000.00	66.36%	$9,63,000.00
Manufacturing Overhead cost	$6,84,000.00	33.64%	$13,49,000.00	66.36%	$20,33,000.00
Total Cost assigned to Product	$25,32,000.00		$58,22,000.00		$83,54,000.00

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	$15,24,000.00	28.44%	$38,34,000.00	71.56%	$53,58,000.00
Direct Labor Cost	$3,24,000.00	33.64%	$6,39,000.00	66.36%	$9,63,000.00
Indirect Cost:
Supporting direct labor cost	$2,23,200.00	33.64%	$4,40,200.00	66.36%	$6,63,400.00
Batch Setups	$3,12,000.00	54.55%	$2,60,000.00	45.45%	$5,72,000.00
Product sustaining	$3,75,000.00	50.00%	$3,75,000.00	50.00%	$7,50,000.00
Total Cost Assigned to Products	$27,58,200.00		$55,48,200.00		$83,06,400.00
Cost not assigned to products:
Others					$47,600.00
Total Cost					$83,54,000.00