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	$	118.00			$	84.00
Direct materials per unit	$	65.00			$	52.00
Direct labor per unit	$	13.50			$	9.00
Direct labor-hours per unit		1.5	DLHs			1.0	DLHs
Estimated annual production and sales		28,000	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	$	1,819,000
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.)

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)	$	588,500				42,000			65,000			107,000
Batch setups (setups)		690,000				390			300			690
Product sustaining (number of products)		500,000				1			1			2
Other		40,500				NA			NA			NA
Total manufacturing overhead cost	$	1,819,000

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.)

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

	1
	Product margin under traditional system is
		Xtreme	Pathfinder	Total
A	No. of units	28,000	65,000	93,000
B	Sale price per unit	118	84
C=A*B	Sale Value	3,304,000	5,460,000	8,764,000
D	Direct Material	1,820,000	3,380,000	5,200,000
E	Direct Labor	378,000	585,000	963,000
F=D+E	Total Direct Costs	2,198,000	3,965,000	6,163,000
G	Manufacturing Overhead	714,000	1,105,000	1,819,000
H =F+G	Total Product Cost	2,912,000	5,070,000	7,982,000
I=C-H	Product Margin	392,000	390,000	782,000

	2
	Product Margin under ABC system is
		Xtreme	Pathfinder	Total
A	No. of units	28,000	65,000	93,000
B	Sale price per unit	118	84
C=A*B	Sale Value	3,304,000	5,460,000	8,764,000
D	Direct Material	1,820,000	3,380,000	5,200,000
E	Direct Labor	378,000	585,000	963,000
F=D+E	Total Direct Costs	2,198,000	3,965,000	6,163,000
G	Manufacturing Overhead (ABC)	871,000	907,500	1,778,500
H =F+G	Total Product Cost	3,069,000	4,872,500	7,941,500
I=C-H	Product Margin	235,000	587,500	822,500
	Activity	Activity Cost Pool	Cost driver	Xtreme	Calculation	Pathfinder	Calculation
	Supporting direct labour	$588,500	Direct labour hours	231,000	42000/107000*588500	357,500	65000/107000*588500
	Batch setups	$690,000	Setup hours	390,000	390/690*690000	300,000	300/690*690000
	Product Sustaining	$500,000	No. of products	250,000	1/2*500000	250,000	1/2*500000
	Total	$1,778,500		$871,000		$907,500

3.

Comparison of traditional and activity-based cost assignment is as follows:
Traditional Cost system
	Xtreme		Pathfinder		Total
	Amount	% of total amount	Amount	% of total amount	Amount
Direct material	1,820,000	63%	3,380,000	67%	5,200,000
Direct labour	378,000	13%	585,000	12%	963,000
Manufacturing overhead	714,000	25%	1,105,000	22%	1,819,000
Total cost assigned to products	2,912,000		5,070,000		7,982,000
Activity Based Costing System
	Xtreme		Pathfinder		Total
	Amount	% of total amount	Amount	% of total amount	Amount
Activity Based Costing System
Direct Costs
Direct material	1,820,000	59%	3,380,000	69%	5,200,000
Direct labour	378,000	12%	585,000	12%	963,000
Indirect Costs
Supporting direct labour	231,000	8%	357,500	7%	588,500
Batch setups	390,000	13%	300,000	6%	690,000
Product Sustaining	250,000	8%	250,000	5%	500,000
Total Cost assigned to products	3,069,000	100%	4,872,500	100%	7,941,500
Costs not assigned to products
Other					40,500
Total Costs					7,982,000