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	$	132.00		$	94.00
Direct materials per unit	$	64.60		$	53.00
Direct labor per unit	$	9.60		$	8.00
Direct labor-hours per unit		1.2	DLHs		1.0	DLHs
Estimated annual production and sales		24,000	units		70,000	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	$	2,470,000
Estimated total direct labor-hours		98,800	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)	$	642,200		28,800	70,000	98,800
Batch setups (setups)		915,000		350	260	610
Product sustaining (number of products)		840,000		1	1	2
Other		72,800		NA	NA	NA
Total manufacturing overhead cost	$	2,470,000

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.

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 $0

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 $0

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 % % % % % % Total cost assigned to products $0 $0 $0 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 $0 $0 $0 Costs not assigned to products: Total cost $0

Answer 1

Solution 1:

Predetermined overhead rate = 2470000/98800 = $25 per DLH

Computation of Product Margin - Traditional Costing System
Particulars	Xtreme	Pathfinder	Total
Selling price per unit	$132.00	$94.00
Direct material per unit	$64.60	$53.00
Direct labor per unit	$9.60	$8.00
Manufacturing overhead cost per unit (Direct labor hours per unit* $25)	$30.00	$25.00
Product Margin per unit	$27.80	$8.00
Nos of units sold	24000	70000
Total Margin (Product margin per unit * Nos of unit sold)	$6,67,200	$5,60,000	$12,27,200

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	$6,42,200.00	Direct Labor hours	98800	$6.50	28800	$1,87,200.00	70000	$4,55,000.00
Batch Setups	$9,15,000.00	Setups	610	$1,500.00	350	$5,25,000.00	260	$3,90,000.00
Product sustaining	$8,40,000.00	Number of products	2	$4,20,000.00	1	$4,20,000.00	1	$4,20,000.00
Other	$72,800.00	No allocation
Total	$24,70,000.00					$11,32,200.00		$12,65,000.00
Nos of units						24000		70000
Allocated overhead per unit						$47.18		$18.07

Computation of Product Margin - Activity based Costing System
Particulars	Xtreme	Pathfinder	Total
Selling price per unit	$132.00	$94.00
Direct material per unit	$64.60	$53.00
Direct labor per unit	$9.60	$8.00
Allocated Manufacturing overhead cost per unit	$47.18	$18.07
Product Margin per unit	$10.63	$14.93
Nos of units sold	24000	70000
Total Margin (Product margin per unit * Nos of unit sold)	$2,55,000	$10,45,000	$13,00,000

Solution 3:

Quantity comparison of traditional cost assignment
Particulars	Xtreme		Pathfinder		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Material Cost	$15,50,400.00	29.47%	$37,10,000.00	70.53%	$52,60,400.00
Direct Labor Cost	$2,30,400.00	29.15%	$5,60,000.00	70.85%	$7,90,400.00
Manufacturing Overhead cost	$7,20,000.00	29.15%	$17,50,000.00	70.85%	$24,70,000.00
Total Cost assigned to Product	$25,00,800.00		$60,20,000.00		$85,20,800.00
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	$15,50,400.00	29.47%	$37,10,000.00	70.53%	$52,60,400.00
Direct Labor Cost	$2,30,400.00	29.15%	$5,60,000.00	70.85%	$7,90,400.00
Indirect Cost:
Supporting direct labor cost	$1,87,200.00	29.15%	$4,55,000.00	70.85%	$6,42,200.00
Batch Setups	$5,25,000.00	57.38%	$3,90,000.00	42.62%	$9,15,000.00
Product sustaining	$4,20,000.00	50.00%	$4,20,000.00	50.00%	$8,40,000.00
Total Cost Assigned to Products	$29,13,000.00		$55,35,000.00		$84,48,000.00
Cost not assigned to products:
Others					$72,800.00
Total Cost					$85,20,800.00