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

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

1	Compute the product Margins for the Xtreme and the pathfinder products under the company's traditional costing system
		Predetermined overhead rate
		Estimated total manufacturing overhead cost/Estimated total direct labors
		2033000/107000
		$19 per DLH
			Xtreme	Pathfinder	Total
		sales	2880000	6532000	9412000
		Direct Materials	1524000	3834000	5358000
		Direct labor	324000	639000	963000
		Manufacturing overhead applied	684000	1349000	2033000
			(24000*1.5*$19)	(71000*1*$19)	0
		Total Manufacturing cost	2532000	5822000	8354000
		Product Margin	348000	710000	1058000
2
	Activity rates
		Activity cost pool	Total cost (a)	Total activity (b)	(a/b)
		Supporting direct labor	663400	107000	6.2	Per DLH
		Batch setups	572000	440	1300	Per setup
		Product sustaining	750000	2	375000	Per product
	Product margins would be computed by using activity rates
			Xtreme	Pathfinder	Total
		sales	2880000	6532000	9412000
		Direct Materials	1524000	3834000	5358000
		Direct labor	324000	639000	963000
		Supporting direct labor	223200	440200	663400
		Batch setups	312000	260000	572000
		Product sustaining	375000	375000	750000
		Total Manufacturing cost	2758200	5548200	8306400
		Product Margin	121800	983800	1105600

Quantitave comparison is as follows

Traditional approach
	Xtreme		Pathfinder		Total
sales	2880000	30.6%	6532000	69.4%	9412000
Direct Materials	1524000	28.4%	3834000	71.6%	5358000
Direct labor	324000	33.6%	639000	66.4%	963000.3
Manufacturing overhead applied	684000	33.6%	1349000	66.4%	2033000
	(24000*1.5*$19)		(71000*1*$19)		0
Total Manufacturing cost	2532000	30.3%	5822000	69.7%	8354000
Product Margin	348000	32.9%	710000	67.1%	1058000
ABC
	Xtreme		Pathfinder		Total
sales	2880000	30.6%	6532000	69.4%	9412000
Direct Materials	1524000	28.4%	3834000	71.6%	5358000
Direct labor	324000	33.6%	639000	66.4%	963000.3
Supporting direct labor	223200	33.6%	440200	66.4%	663400.3
Batch setups	312000	54.5%	260000	45.5%	572000.5
Product sustaining	375000	50.0%	375000	50.0%	750000.5
Total Manufacturing cost	2758200	33.2%	5548200	66.8%	8306400
Product Margin	121800	11.0%	983800	89.0%	1105600