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	$	125.00		$	91.00
Direct materials per unit	$	64.20		$	55.00
Direct labor per unit	$	16.00		$	10.00
Direct labor-hours per unit		1.6	DLHs		1.0	DLHs
Estimated annual production and sales		25,000	units		71,000	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	$	2,331,000
Estimated total direct labor-hours		111,000	DLHs

Required:

1. 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

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)	$	888,000		40,000	71,000	111,000
Batch setups (setups)		583,000		310	220	530
Product sustaining (number of products)		780,000		1	1	2
Other		80,000		NA	NA	NA
Total manufacturing overhead cost	$	2,331,000

2. 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

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.

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 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 Costs not assigned to products: Total cost

Answer 1

Answer 1.
Predetermined Overhead Rate = $2,331,000 / 111,000 Lab. Hrs
Predetermined Overhead Rate = $21 per DLH
Statement Showing Product Margin
Under Traditional Costing System
	Xtreme	Pathfinder	Total
Sales in Unit	25000	71000
SP per Unit	$125	$91
Sales in $	3,125,000	6,461,000	9,586,000
Less: Cost of Goods Sold
Direct material	1,605,000	3,905,000	5,510,000
Direct Labour	400,000	710,000	1,110,000
Manufacturing Overhead	840,000	1,491,000	2,331,000
Cost of goods Sold	2,845,000	6,106,000	8,951,000
Gross / Product Margin	280,000	355,000	635,000
Answer 2.
Activity Cost Pool	Estimated Overhead	Expected use of Cost Drivers	Activity-Based Overhead rate
Supporting Direct Labor	888,000	111,000	8	per DLH
Batch Setups	583,000	530	1,100	per setup
Product Sustaining	780,000	2	390,000	per product
others	80,000	NA	NA
Total Overhead	2,331,000
Alocation of Overhead Cost
Under ABC
Particulars	Hiking Boots		Total
	Xtreme	Pathfinder
Supporting Direct Labor	320,000	568,000	888,000
Batch Setups	341,000	242,000	583,000
Product Sustaining	390,000	390,000	780,000
Total	1,051,000	1,200,000	2,251,000
Statement Showing Product Margin
Under ABC
	Xtreme	Pathfinder	Total
Sales in Unit	25000	71000
SP per Unit	125	91
Sales in $	3,125,000	6,461,000	9,586,000
Less: Cost of Goods Sold
Direct material	1,605,000	3,905,000	5,510,000
Direct Labour	400,000	710,000	1,110,000
Manufacturing Overhead	1,051,000	1,200,000	2,251,000
Cost of goods Sold	3,056,000	5,815,000	8,871,000
Product Margin	69,000	646,000	715,000
Non Traceable Other Manufacturing Exp.			80,000
Net Operating Profit / (Loss)			635,000
Answer 3.
	Xtreme		Pathfinder		Total
	Amt	% of Total Amt.		% of Total Amt.	Amount
Traditional Cost System
Direct material	1,605,000	29.13%	3,905,000	70.87%	5,510,000
Direct Labour	400,000	36.04%	710,000	63.96%	1,110,000
Manufacturing Overhead	840,000	36.04%	1,491,000	63.96%	2,331,000
Total Cost Assigned to product	2,845,000		6,106,000		8,951,000
	Xtreme		Pathfinder		Total
	Amt	% of Total Amt.		% of Total Amt.	Amount
Activity Based Costing
Direct Costs
Direct material	1,605,000	29.13%	3,905,000	70.87%	5,510,000
Direct Labour	400,000	36.04%	710,000	63.96%	1,110,000
Indirect Costs
Supporting Direct Labor	320,000	36.04%	568000	63.96%	888,000
Batch Setups	341000	58.49%	242000	41.51%	583,000
Product Sustaining	390000	50.00%	390000	50.00%	780,000
Total Cost assigned to products	3,056,000		5,815,000		8,871,000
Costs not assigned to products
Non Traceable Other Manufacturing Exp.					80,000
Net Operating Profit / (Loss)					8,951,000