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	$	141.00		$	91.00
Direct materials per unit	$	64.50		$	52.00
Direct labor per unit	$	17.00		$	10.00
Direct labor-hours per unit		1.7	DLHs		1.0	DLHs
Estimated annual production and sales		23,000	units		74,000	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 $ 2,714,400 Estimated total direct labor-hours 113,100 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) $ 791,700 39,100 74,000 113,100 Batch setups (setups) 1,062,000 340 250 590 Product sustaining (number of products) 790,000 1 1 2 Other 70,700 NA NA NA Total manufacturing overhead cost $ 2,714,400 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.

Answer 1

Solution 1:

Overhead Allocation - Traditional Costing System
Particulars	Xtreme	Pathfinder	Total
Estimated annual Production (In units)	23000	74000
Direct Labour Hours Per unit	1.7	1
Total Direct Labour Hours	39100	74000	113100
Overhead Cost Allocation basis direct labour hours (Overhead / Total hours * Labor hours of model)	$938,400.00	$1,776,000.00	$2,714,400.00
Manufacturing overhead cost per unit (Allocated Overhead / Nos of units)	$40.80	$24.00

Computation of Product Margin - Traditional Costing System
Particulars	Xtreme	Pathfinder	Total
Selling price per unit	$141.00	$91.00
Direct material per unit	$64.50	$52.00
Direct labor per unit	$17.00	$10.00
Manufacturing overhead cost per unit	$40.80	$24.00
Product Margin per unit	$18.70	$5.00
Nos of units sold	23000	74000
Total Margin (Product margin per unit * Nos of unit sold)	$430,100.00	$370,000.00	$800,100.00

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	$791,700.00	Direct Labor hours	113100	$7.00	39100	$273,700.00	74000	$518,000.00
Batch Setups	$1,062,000.00	Setups	590	$1,800.00	340	$612,000.00	250	$450,000.00
Product sustaining	$790,000.00	Number of products	2	$395,000.00	1	$395,000.00	1	$395,000.00
Other	$70,700.00	No allocation
Total	$2,714,400.00					$1,280,700.00		$1,363,000.00
Nos of units						23000		74000
Allocated overhead per unit						$55.68		$18.42

Computation of Product Margin - Activity based Costing System
Particulars	Xtreme	Pathfinder	Total
Selling price per unit	$141.00	$91.00
Direct material per unit	$64.50	$52.00
Direct labor per unit	$17.00	$10.00
Allocated Manufacturing overhead cost per unit	$55.68	$18.42
Product Margin per unit	$3.82	$10.58
Nos of units sold	23000	74000
Total Margin (Product margin per unit * Nos of unit sold)	$87,800.00	$783,000.00	$870,800.00

Solution 3:

Quantity comparison of traditional cost assignment
Particulars	Xtreme		Pathfinder		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount	% of total Amount
Direct Material Cost	$1,483,500.00	52.74%	$3,848,000.00	60.47%	$5,331,500.00	58.10%
Direct Labor Cost	$391,000.00	13.90%	$740,000.00	11.63%	$1,131,000.00	12.32%
Manufacturing Overhead cost	$938,400.00	33.36%	$1,776,000.00	27.91%	$2,714,400.00	29.58%
Total	$2,812,900.00		$6,364,000.00		$9,176,900.00

Quantity comparison of Activity Based cost assignment
Particulars	Xtreme		Pathfinder		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount	% of total Amount
Direct Cost:
Direct Material Cost	$1,483,500.00	47.02%	$3,848,000.00	64.66%	$5,331,500.00	58.55%
Direct Labor Cost	$391,000.00	12.39%	$740,000.00	12.43%	$1,131,000.00	12.42%
Indirect Cost:
Supporting direct labor cost	$273,700.00	8.67%	$518,000.00	8.70%	$791,700.00	8.69%
Batch Setups	$612,000.00	19.40%	$450,000.00	7.56%	$1,062,000.00	11.66%
Product sustaining	$395,000.00	12.52%	$395,000.00	6.64%	$790,000.00	8.68%
Total Cost Assigned to Products	$3,155,200.00		$5,951,000.00		$9,106,200.00
Cost not assigned to products					$70,700.00
Total Cost					$9,176,900.00