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	$	118.00		$	84.00
Direct materials per unit	$	65.00		$	52.00
Direct labor per unit	$	13.50		$	9.00
Direct labor-hours per unit		1.5	DLHs		1.0	DLHs
Estimated annual production and sales		28,000	units		65,000	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	$	1,819,000
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)	$	588,500		42,000	65,000	107,000
Batch setups (setups)		690,000		390	300	690
Product sustaining (number of products)		500,000		1	1	2
Other		40,500		NA	NA	NA
Total manufacturing overhead cost	$	1,819,000

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

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

Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places.)

	Xtreme Pathfinder Total % of % of Amount Total Amount Amount Total Amount Amount Traditional Cost System % % % % % % Total cost assigned to products 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 Costs not assigned to products: Total cost

Answer 1

Smoky mountain corporation

Traditional costing

	Xtreme	Pathfinder	Total
DLH	42000	65000	107000
Sales revenue(a)	3304000	5460000	8764000
Less:-Costs
Direct materials	1820000	3380000	5200000
Manufacturing OH	714000	1105000	1819000	1819000*42000/107000=714000
Direct labour	378000	585000	963000
Total costs assigned(b)	2912000	5070000	7982000
Product margin(a-b)	392000	390000	782000

  ABC costing

	Xtreme	Pathfinder	Total
Sales revenue(a)	3304000	5460000	8764000
Less:-Costs
Direct costs:-
DM	1820000	3380000	5200000
DL	378000	585000	963000
Indirect costs:-
Supporting direct labor	231000	357500	588500
Setups	390000	300000	690000
Product sustaining	250000	250000	500000
Total costs assigned(b)	3069000	4872500	7941500
Product margin (a-b)	235000	587500	822500
Cost not assigned
Other			40500
NOL			782000

Calculation of predetermined OH allocation rate

	Total cost	Allocation base	Predetermined OH allocation rate
Supporting direct labour	588500	107000	5.5	Per labour hour
Product sustaining	500000	2	250000	Per product
Setups	690000	690	1000	Per setup
	1778500

Quantitative Comparision(Horizantal analysis is done)

	Xtreme		Pathfinder		Total
	Amount	%of total amount	Amount	%of total amount
Traditional cost system
Direct materials	1820000	35	3380000	65	5200000
Manufacturing OH	714000	39.25	1105000	60.75	1819000
Direct labour	378000	39.25	585000	60.75	963000
Total costs	2912000		5070000		7982000
Activity based costing system
Direct costs
DM	1820000	35	3380000	65	5200000
DL	378000	39.25	585000	60.75	963000
Indirect costs:-
Supporting direct labour	231000	39.25	357500	60.75	588500
sertups	390000	56.52	300000	43.48	690000
Product sustaining	250000	50	250000	50	500000
Total cost assigned	3069000		4872500		7941500
Costs not assigned
Other					40500
Total costs					7982000