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		$	87.00
Direct materials per unit	$	65.20		$	51.00
Direct labor per unit	$	11.20		$	8.00
Direct labor-hours per unit		1.4	DLHs		1.0	DLHs
Estimated annual production and sales		30,000	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	$	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)	$	631,300		42,000	65,000	107,000
Batch setups (setups)		876,000		410	320	730
Product sustaining (number of products)		460,000		1	1	2
Other		65,700		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

	Smoky Mountain Corporation
	Tradiitonal Costing System	Xtereme	Pathfinder		Estimated FOH	2033000
	Selling Price	120.00	87.00		Estimated DLH	107000				Expected Activity
	Less: Direct Material PU	65.20	51.00		Overhead Recovery Rate PU	19.00	Activity	Activity Measure	Estimated OH	Xtereme	Pathfinder	Total	Per Activty Measure
	Less: Direct Labor PU	11.20	8.00				Supporting DL	DLH	631300	42000	65000	107000	5.90
	Less: Allocated Manufacturing OH	26.60	19.00				Batch Setups	Setups	876000	410	320	730	1,200.00
	(1.4*19)/(1*19)						Product Susbs	No of Product	460000	1	1	2	2,30,000.00
	Product Margin	17.00	9.00				Others	NA	65700	NA	NA	0
							Total M. OH		2033000
	Smoky Mountain Corporation						Smoky Mountain Corporation
	Activity Based Costing System:	Xtereme	Pathfinder					Xtereme	Pathfinder
	Selling Price	120.00	87.00				Supporting DL	2,47,800	3,83,500
	Less: Direct Material PU	65.20	51.00				Batch Setups	4,92,000	3,84,000
	Less: Direct Labor PU	11.20	8.00				Product Susbs	2,30,000	2,30,000
	Less: Allocated Manufacturing OH	32.33	15.35				Others	-	-
	(Working Note)						Total M. OH(A)	9,69,800	9,97,500
	Product Margin	11.27	12.65				Units(B)	30,000	65,000
							Per Unit(A/B)	32.327	15.35
	Quantitative Comparison of Both Methods:
	Tradiitonal Costing System	Xtereme	%	Pathfinder	%	Total
	Direct Material	65.20	63.30%	51.00	65.38%	116.20
	Direct Labor	11.20	10.87%	8.00	10.26%	19.20
	Manufacturing OH	26.60	25.83%	19.00	24.36%	45.60
	Total Cost Assigned to products	103.00	100.00%	78.00	100.00%	181.00
	Activity Based Costing System:
	Direct Costs:
	Direct Material	65.20	59.97%	51.00	68.60%	116.20
	Direct Labor	11.20	10.30%	8.00	10.76%	19.20
	Indirect Costs:
	Supporting DL	8.26	7.60%	5.90	7.94%	14.16
	Batch Setups	16.40	15.08%	5.91	7.95%	22.31
	Product Susbs	7.67	7.05%	3.54	4.76%	11.21
	Total Cost Assigned to products	108.73	100.00%	74.35	100.00%	183.07
	Units	30,000		65,000
	Total Cost	32,61,800		48,32,500		80,94,300
	Cost not Assigned to products:
	Others					65700
	Total Costs					81,60,000