Question

Smoky Mountain Corporation makes two types of hiking boots—Xtreme and the Pathfinder. Data concerning these two product lines appear below:

	Xtreme			Pathfinder
Selling price per unit	$	140.00		$	99.00
Direct materials per unit	$	72.00		$	53.00
Direct labor per unit	$	24.00		$	12.00
Direct labor-hours per unit		2.0	DLHs		1.0	DLHs
Estimated annual production and sales		20,000	units		80,000	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	$1,980,000
Estimated total direct labor-hours	120,000 DLHs

Required:
1.	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.)

     

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		Expected Activity
Activities and Activity Measures	Overhead Cost		Xtreme	Pathfinder	Total
Supporting direct labor (direct labor-hours)	$	783,600	40,000	80,000	120,000
Batch setups (setups)		495,000	200	100	300
Product sustaining (number of products)		602,400	1	1	2
Other		99,000	NA	NA	NA
Total manufacturing overhead cost	$	1,980,000

Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system. (Negative product margins should be indicated with a minus sign. Round your intermediate calculations to 2 decimal places.)

3.	Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Do not round intermediate calculations. Round your "Percentage" answer to 1 decimal place. (i.e. .1234 should be entered as 12.3))

     

     

Answer 1

Solution:
1.	The product margins using the traditional approach
		Xtreme	Pathfinder	Total
	Product margin	$220,000	$1,400,000	$1,620,000
Working Notes:
	Using traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours using the predetermined overhead rate
	Predetermined overhead rate = Estimated total manufacturing overhead cost / Estimated total direct labor-hours
		=$1,980,000/120,000 DLHs
		=$16.50 per DLHs
		Xtreme	Pathfinder	Total
	Sales	$2,800,000	$7,920,000	$10,720,000	a
		[$140 x 20,000]	[80,000 x $99 ]
	Direct materials	$1,440,000	$4,240,000	$5,680,000	b
		[$72 x 20,000]	[80,000 x $53]
	Direct labor	$480,000	$960,000	$1,440,000	c
		[$24 x 20,000]	[80,000 x $12]
	Manufacturing overhead     applied @ $16.50 per DLHs	$660,000	$1,320,000	$1,980,000	d
		[20,000 x 2 x 16.50]	[80,000 x 1 x 16.50]
	Total manufacturing cost	$2,580,000	$6,520,000	$9,100,000	e=b+c+d
	Product margin	$220,000	$1,400,000	$1,620,000	f=a-e
2.
	Activity-based costing system
		Xtreme	Pathfinder	Total
	Product margin	($12,400)	$1,731,400	$1,719,000
Working Notes:
	Under Activity-based costing system determination of the activity rates:
		a	b	c=a/b
	Activity Cost Pool	Total cost	Total activity	Activity Rate
	Supporting direct labor	783,600	120,000	6.53 per DLH
	Batch setups	495,000	300	1650 per setup
	Product sustaining	602,400	2	301,200 per product
	Now the product margins would be computed as follows:
		Xtreme	Pathfinder	Total
	Sales	$2,800,000	$7,920,000	$10,720,000	a
		[$140 x 20,000]	[80,000 x $99 ]
	Direct materials	$1,440,000	$4,240,000	$5,680,000	b
		[$72 x 20,000]	[80,000 x $53]
	Direct labor	$480,000	$960,000	$1,440,000	c
		[$24 x 20,000]	[80,000 x $12]
	Supporting direct labor	261,200	522,400	783,600	d
		[40,000 x 6.53 ]	[80,000 x 6.53 ]
	Batch setups	330,000	165,000	495,000	e
		[200 x 1650 ]	[100 x 1650 ]
	Product sustaining	301,200	301,200	602,400	f
		[1 x 301,200 ]	[1 x 301,200 ]
	Total cost	$2,812,400	$6,188,600	$9,001,000	g=b+c+d+e+f
	Product margin	($12,400)	$1,731,400	$1,719,000	h=a-g
Notes:	Other product cost are not allocated as they represents idle capacity cost which is not assigned to product cost
3.
		Xtreme		Pathfinder		Total
		Amount	% of total amount	Amount	% of total amount
	Traditional Cost System
	Direct materials	$1,440,000	25.4%	$4,240,000	74.6%	$5,680,000
	Direct labor	$480,000	33.3%	$960,000	66.7%	$1,440,000
	Manufacturing overhead	$660,000	33.3%	$1,320,000	66.7%	$1,980,000
	Total manufacturing cost	$2,580,000		$6,520,000		$9,100,000
		Xtreme		Pathfinder		Total
		Amount	% of total amount	Amount	% of total amount
	Activity-Based Costing System
	Direct costs:
	Direct materials	$1,440,000	25.4%	$4,240,000	74.6%	$5,680,000
	Direct labor	$480,000	33.3%	$960,000	66.7%	$1,440,000
	Indirect costs:
	Supporting direct labor	261,200	33.3%	522,400	66.7%	783,600
	Batch setups	330,000	66.7%	165,000	33.3%	495,000
	Product sustaining	301,200	50.0%	301,200	50.0%	602,400
	Total cost assigned to products	$2,812,400		$6,188,600		$9,001,000
	Costs not assigned to products
	Other					99,000
	Total Cost					$9,100,000
Working Notes:
		a	b=(a/e)x 100%	c	d=(c/e) x 100%	e
		Xtreme		Pathfinder		Total
		Amount	% of total amount	Amount	% of total amount
	Traditional Cost System
	Direct materials	$1,440,000	25.4%	$4,240,000	74.6%	$5,680,000
	Direct labor	$480,000	33.3%	$960,000	66.7%	$1,440,000
	Manufacturing overhead	$660,000	33.3%	$1,320,000	66.7%	$1,980,000
	Total manufacturing cost	$2,580,000		$6,520,000		$9,100,000
		a	b=(a/e)x 100%	c	d=(c/e) x 100%	e
		Xtreme		Pathfinder		Total
		Amount	% of total amount	Amount	% of total amount
	Activity-Based Costing System
	Direct costs:
	Direct materials	$1,440,000	25.4%	$4,240,000	74.6%	$5,680,000
	Direct labor	$480,000	33.3%	$960,000	66.7%	$1,440,000
	Indirect costs:
	Supporting direct labor	261,200	33.3%	522,400	66.7%	783,600
	Batch setups	330,000	66.7%	165,000	33.3%	495,000
	Product sustaining	301,200	50.0%	301,200	50.0%	602,400
	Total cost assigned to products	$2,812,400		$6,188,600		$9,001,000
	Costs not assigned to products
	Other					99,000
	Total Cost					$9,100,000
Please feel free to ask if anything about above solution in comment section of the question.