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

Answers:

1. Compute the product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system:

Under the traditionl costing system,manufacturing overhead is applied to products using the predetermined overhead rate computed as follows:

                                                                                    Estimated Manufacturing Overhead Cost

      Predetermined overhead rate = –––––––––––––––––––––––––––––––––––––––––––––––

Estimated total direct labour hours

  

= $ 2033000 / 107000

= $ 19.00 per direct labour hour.

The Computation production margin of two products as follows:

Particulars	Amount in $
Xtreme	Pathfinder	Total
Sales                        (A)	28,80,000	65,32,000	94,12,000
Direct Material       (B)	15,24,000	38,34,000	53,58,000
Direct Labour ( C )	4,86,000	6,39,000	11,25,000
Manufacturing overhead at $19.00 per direct labour hour (D)	6,84,000	13,49,000	20,33,000
Total Manufacturing cost (E = B+C+D)	26,94,000	58,22,000	85,16,000
Product Marign ( F = A-E)	1,86,000	7,10,000	8,96,000

1. Compute the product margins for the Xtreme and the Pathfinder products under the Activity based costing system:

Computation of Activity Rate
Actitivity Pool	Activity driver	Acitivity Cost	Acitity base	Activity Rate
Supporting direct labor	Direct labour hours	6,63,400	1,07,000	6
Batch setups	Setups	5,72,000	440	1,300
Product sustaining	Number of products	7,50,000	2	3,75,000

Computation of product margin under Activity based costing
Particulars	Xtreme	Pathfinder	Total (in $)
Sales                        (A)	28,80,000	65,32,000	94,12,000
Direct Material       (B)	15,24,000	38,34,000	53,58,000
Direct Labour         ( C )	4,86,000	6,39,000	11,25,000
Indirect Costs (D )
a. Supporting direct labour	2,23,200	4,40,200	6,63,400
b. Batch Setups	3,12,000	2,60,000	5,72,000
c. Product Sustaining	3,75,000	3,75,000	7,50,000
Total Indirect Costs (D = a+b+c)	9,10,200	55,48,200	84,68,400
Other Costs (E)	23,800	23,800	47,600
Total Cost (F = B+C+ D+E)	29,44,000	55,72,000	85,16,000
Product Marign ( G = A-F)	(64,000)	9,60,000	8,96,000

Note: Other costs allocated in the ratio of number of products.