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	$	138.00			$	90.00
Direct materials per unit	$	64.40			$	51.00
Direct labor per unit	$	13.50			$	9.00
Direct labor-hours per unit		1.5	DLHs			1.0	DLHs
Estimated annual production and sales		22,000	units			73,000	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	$	2,438,000
Estimated total direct labor-hours		106,000		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.)

	Xtreme Pathfinder Total Product margin $0

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)	$	646,600				33,000			73,000			106,000
Batch setups (setups)		969,000				330			240			570
Product sustaining (number of products)		780,000				1			1			2
Other		42,400				NA			NA			NA
Total manufacturing overhead cost	$	2,438,000

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.)

	Xtreme Pathfinder Total Product margin $0

	Xtreme			Pathfinder			Total
		% of			% of
	Amount	Total Amount		Amount	Total Amount		Amount
Traditional Cost System
			%			%
			%			%
			%			%
Total cost assigned to products	$0			$0			0

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))

	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

Computation of Overhead Recovery Rate
Estimated total manufacturing overhead	$2,438,000.00
Estimated total direct labor-hours (In DLH)	106000
Manufacturing Overhead per DLH	$23.00

1. Computation of product Margin
	Xtreme	Pathfinder
Selling price per unit	$138.00	$90.00
Less: Direct materials per unit	$64.40	$51.00
Direct labor per unit	$13.50	$9.00
MOH per unit (1.5 DLHX$23) (1DLHX$23)	$34.50	$23.00
Product margin	$25.60	$7.00

W/NoteComputation of per Activity Overhead and allocation of Overhead on Product
	Estimated	Expected Activity			Per activity overhead	Allocation of Overhead
Activities and activity measures	Overhead Cost	Xtreme	Pathfinder	Total		Xtreme	Pathfinder
Supporting Direct labor(DLH)	646600	33000	73000	106000	6.1	201300	445300
Batch Setups(Setups)	969000	330	240	570	1700	561000	408000
Product Sustaining(numberof products)	780000	1	1	2	390000	390000	390000
Other	42400	NA	NA	NA	NA
Total manufacturing overhead cost	2438000					1152300	1243300
No. of Unit						22000	73000
Manufacturing Overhead Per Unit						52.38	17.03

2. Computation of Product margin on Activty based costing system
	Xtreme	Pathfinder
Selling price per unit	$138.00	$90.00
Less: Direct materials per unit	$64.40	$51.00
Direct labor per unit	$13.50	$9.00
MOH per unit	$52.38	$17.03
Product margin	$7.72	$12.97

Requirement -3
	Xtreme		Pathfinder		Total
		% of		% of
	Amount	Total Amount	Amount	Total Amount	Amount
Traditional cost system
Direct Material	$3,036,000	0.58	$3,723,000	0.61	$6,759,000
Direct Labor	$1,416,800	0.27	$657,000	0.11	$2,073,800
manufacturing overhead	$759,000	0.15	$1,679,000	0.28	$2,438,000
Total cost assigned to products	$5,211,800	1.00	$6,059,000	1.00	$11,270,800

Requirement -4
	Xtreme		Pathfinder		Total
		% of		% of
	Amount	Total Amount	Amount	Total Amount	Amount
Activity based costing system
Direct cost:
Direct Material	$3,036,000	0.54	$3,723,000	0.66	$6,759,000
Direct Labor	$1,416,800	0.25	$657,000	0.12	$2,073,800
Indirect cost:
manufacturing overhead	$1,152,360	0.21	$1,243,190	0.22	$2,395,550
Total cost assigned to products	$5,605,160	1.00	$5,623,190	1.00	$11,228,350
Cost not assigned to products					$42,400
Total cost					$11,270,750