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	$	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. 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) $ 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. 3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. Compute the product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system. (Round your intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.) Xtreme Pathfinder Total Product margin $392,000 $390,000 $782,000 Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system. (Round your intermediate calculations to 2 decimal places.) Xtreme Pathfinder Total Product margin $0 Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places.) Xtreme Pathfinder Total % of % of Amount Total Amount Amount Total Amount Amount Traditional Cost System % % % % % % Total cost assigned to products $0 $0 $0 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

Step 1	Predetermined Manufacturing Overhead rate
	Estimated total manufacturing overhead
	Estimated total direct labor-hours
	1819000
	107000
	$17 Per Direct Labour Hour
Step 2	Direct Labour Hour Required Per unit
	Xtreme =	1.5 Per Hour
	Pathfinder =	1 Per Hour
	product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system
	Particulars	Xtreme		Pathfinder
	Direct Material Per unit	65		52
	Direct Labour Per unit	13.5		9
	Manufacturing Overhead
	Extreme = (1.5 x $17)	25.5
	Pathfinder = (1 x $17)			17
	Total Cost Per Unit (A)	104		78
	Selling price per unit (B)	118		84
	Product Margin Per Unit C = (B-A)	14		6
	No. Of Units (D)	28000		65000
	Product Margin (C x D)	392000		390000
	Traditional costing system
	Particulars	Xtreme		Pathfinder		Total
	Product Margin	392000		390000		782000
2	Activity Based Costing
	Particulars	Xtreme		Pathfinder
	Direct Material Per unit	65		52
	Direct Labour Per unit	13.5		9
	Prime Cost Per Unit (A)	78.5		61
	No. Of Units (B)	28000		65000
	Total Prime Cost C =( A X B)	2198000		3965000
	Add: Manufacturing Overhead (D) :
	Supporting Direct labour ($588500 in 42000:65000)	231000		357500
	Setup Cost ( $690000 in 390:300)	390000		300000
	Product sustaining cost ($500000 In 1:1)	250000		250000
	Other cost (40500 in 1:1 - No. of Sustaining Units )	20250		20250
	Total Cost Per Unit (F)	3089250		4892750
	Total Sale Value (G)	3304000		5460000
	Product Margin (G-F)	214750		567250
	Activity Based costing system
	Particulars	Xtreme		Pathfinder		Total
	Product Margin	214750		567250		782000
	Quantitative comparison of the traditional and activity-based cost assignments
	Particulars	Xtreme		Pathfinder		Total
	Product Margin as Per Traditional Costing	392000		390000		782000
	Product Margin as Per Activity Based Costing	214750		567250		782000
	Difference	177250		-177250		0
Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places.)
		Xtreme			Pathfinder			Total
			% of			% of
		Amount	Total Amount		Amount	Total Amount		Amount
	Traditional Cost System
	Direct Material	1820000	35	%	3380000	65	%	5200000
	Direct Labour	378000	39.25	%	585000	60.75	%	963000
	Manufacturing Overhead	714000	39.25	%	1105000	60.75	%	1819000
	Total cost assigned to products	$2,912,000			$5,070,000			7982000
		Xtreme			Pathfinder			Total
			% of			% of
		Amount	Total Amount		Amount	Total Amount		Amount
	Activity-Based Costing System
	Direct costs:
	Direct Material	1820000	35	%	3380000	65	%	5200000
	Direct Labour	378000	39.25	%	585000	60.75	%	963000
	Indirect costs:
	Supporting cost	231000	39.25	%	357500	60.75	%	588500
	Set up cost	390000	56.52	%	300000	43.48	%	690000
	Sustaining cost	250000	50.00	%	250000	50.00	%	500000
	Total cost assigned to products	$3,069,000			$4,872,500			$7,941,500
	Costs not assigned to products:
	Other	20250	50.00	%	20250	50.00	%	40500
	Total cost	$3,089,250			$4,892,750			$7,982,000