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

1. Statement Showing Product Margin ( Traditional Costing)
	Xtreme		Pathfinder
	Rate/ Unit	Amount	Rate/ Unit	Amount
Production & Sales unit	30000		65000
Sales (a)	$120.00	$3,600,000.00	$87.00	$5,655,000.00
Direct Material	$65.20	$1,956,000.00	$51.00	$3,315,000.00
Direct Labour	$11.20	$336,000.00	$8.00	$520,000.00
Manufacturing Overhead ( W/Note-2)	$26.60	$798,000.00	$19.00	$1,235,000.00
Total Maufacturing cost (b)	$103.00	$3,090,000.00	$78.00	$5,070,000.00
Product Margin (a-b)	$17.00	$510,000.00	$9.00	$585,000.00
W/Note-1: Computation of Overhead Recovery Rate Total Overhead/Estimated labour Hour =2033000/107000=$19/Hour W/Note-2: Computation of ManufacturingOH/Unit Xtreme Pathfinder Direct Labour Hours/Unit ( in Hour) 1.4 1 Overhead recovery rate /Hour $19.00 $19.00 Over Head recovery rate/Unit $26.60 $19.00 2. Statement Showing Product Margin ( Activity) Xtreme Pathfinder Rate/ Unit Amount Rate/ Unit Amount Production & Sales unit 30000 65000 Sales (a) $120.00 $3,600,000.00 $87.00 $5,655,000.00 Direct Material $65.20 $1,956,000.00 $51.00 $3,315,000.00 Direct Labour $11.20 $336,000.00 $8.00 $520,000.00 Manufacturing Overhead ( W/Note-3) Batch Setup Cost $492,000.00 $384,000.00 Supportive Direct Labour Cost $247,800.00 $383,500.00 Product Suistaining Cost $230,000.00 $230,000.00 Total Maufacturing cost (b) $3,261,800.00 $4,832,500.00 Product Margin (a-b) $338,200.00 $822,500.00 W/Note-3: Computation of Activity wise Manufacturing Overhead Xtreme Pathfinder Total Batch Setup Cost $876,000.00 No. Batches Setup 410 320 730 Allocation of Batch Set up cost $492,000.00 $384,000.00 $876,000.00 (876000*410/730 (876000*320/730 Supporting DirectLabour cost $631,300.00 Direct Labour Hours 42000 65000 107000 Allocation of Supportive Direct Labour Cost $247,800.00 $383,500.00 $631,300.00 ($631300*42/107) ($631300*65/107) Product Suistaining Cost $460,000.00 Number of product 1 1 2 Allocation of Product Suistaining Cost $230,000.00 $230,000.00 $460,000.00 ( $460000/2*1) ( $460000/2*1) Statement Showing Comparison of Traditional and Activity based cost Xtreme Pathfinder Manufacturing Overhead under Traditional Costing $798,000.00 $1,235,000.00 Manufacturing Overhead under Activity Based Costing $969,800.00 $997,500.00 Difference $171,800.00 -$237,500.00