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	$	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. (Do not round your intermediate calculations.)

   

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				Activity
Activities and Activity Measures	Overhead Cost					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. (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

Traditional Method
	per unit	Xtreme	per unit	Pathfinder	Total
No. of units sold		24000		71000	95000
Sales	$120	$2,880,000	$92	$6,532,000	$9,412,000
Less: Direct Material	63.50	1524000	54.00	3834000	$5,358,000
Less: Direct Labor	13.50	324000	9.00	639000	$963,000
Less: Manufacturing Overhead	28.50	684000	19.00	1349000	$2,033,000
	(1.5*19)		(1*19)
Total	105.50	2532000	82.00	5822000
Product Margin	$14.50	$348,000	$10.00	$710,000	ans 1
Predetermined overhead rate	19
2033000/107000
	Xtreme	Pathfinder
ans 1 Product Margin	$14.50	$10.00
ans 2
Activity cost pool	Manu. Over	Total estimated driver	Activity rate	Xtreme	Cost allocated	Pathfinder	Cost allocated
Supporting direct labor	663400	107000	6.20	36000	223200	71000	440200
Batch setup	572000	440	1300	240	312000	200	260000
Product sustaining cost	750000	2	375000	1	375000	1	375000
				Total	910200		1075200
				No. of units	24000		71000
				Overhead cost per unit	37.93		15.14
Activity Based costing
	per unit	Xtreme	per unit	Pathfinder	Total
No. of units sold		20000		70000	90000
Sales	$128	$2,560,000	$90	$6,300,000	$8,860,000
Less: Direct Material	63.10	1262000	50.00	3500000	$4,762,000
Less: Direct Labor	12.00	240000	8.00	560000	$800,000
Less: Manufacturing Overhead	37.93	758600	15.14	1059800	$1,818,400
Total	113.03	2260600	73.14	5119800
Product Margin	$14.97	$299,400	$16.86	$1,180,200
	Xtreme	Pathfinder
Product Margin	$14.97	$16.86
Ans 3
	Xtreme		Pathfinder
Traditional method	Amt	% of Total amt	Amt	Total amt	Total
Direct Material	1262000	26.5	3500000	73.5	4762000
Direct Labor	240000	30.0	560000	70.0	800000
Manufacturing Overhead	684000	33.6	1349000	66.4	2033000
Total	2186000		5409000		7595000
ABC
Direct cost
Direct Material	1262000	26.5	3500000	73.5	4762000
Direct Labor	240000	30.0	560000	70.0	800000
Indirect cost
Supporting direct labor	223200	33.6	440200	66.4	663400
Batch setup	312000	54.5	260000	45.5	572000
Product sustaining cost	375000	50.0	375000	50.0	750000
Total cost assigned	2412200		5135200		7547400
Cost not assigned
Other					47600
Total cost					7595000
Calculation of % are
For example direct material
1262000/4762000*100	26.5	%
If any doubt please comment