Question

Valley View Trailmasters makes two types of tents for mountain camping, the Explorer and the Climber. Data concerning the two product lines is presented in the table below:

	EXPLORER	CLIMBER
Sales price per unit	$390	$615
Direct materials per unit	$92	$115
Direct labor per unit	$51	$75
Estimated annual production	4,000 units	9,000 units

The company has always employed a tradition costing system in which manufacturing overhead is applied to units based on machine hours. Estimated data concerning manufacturing overhead and direct labor hours for the upcoming year appear below:

            Estimated total manufacturing overhead        $484,746

            Estimated total machine hours                          1,000

The company is considering replacing its traditional costing system with an activity based costing system that would assign its indirect product costs to four activity cost pools. Information about the amount assigned to these cost pools, the identified cost driver for each and usage of the cost drivers by the two product lines is presented in the following table:

ACTIVITY	TOTAL COST	COST DRIVER	TOTAL	EXPLORER	CLIMBER
Machine maintenance	$78,840	Machine hours	1,000	350	650
Batch setups	$136,364	Setups	146	60	86
Quality control	$163,020	Inspections	1,650	975	675
Technical support	$106,522	Technical support calls	964	352	612
Total manufacturing overhead cost	$484,746

INSTRUCTIONS: Use EXCEL FROMULAS (Show them to next the value) to calculate the following amounts in the spaces provided on your template.

1. Calculate the predetermined overhead rate using the traditional volume-based costing system.

2. Calculate the total amount of overhead cost that would be assigned to each product line under the company’s traditional costing system.

3. Calculate the gross margin per unit for each product line using traditional volume-based costing.

4. Calculate the activity rate for each cost pool using activity-based costing.

5. Calculate the total amount of overhead cost that would be assigned to each product line using activity-based costing.

6. Calculate the gross margin per unit for each product line under the proposed activity based costing system.

Here is the attached template:

Show formulas as well as the values.

	EXPLORER	CLIMBER		ACTIVITY	TOTAL COST	COST DRIVER	TOTAL	EXPLORER	CLIMBER
Sales price per unit	$390	$615		Machine maintenance	$78,840	Machine hours	1,000	350	650
Direct materials per unit	$92	$115		Batch setups	$136,364	Setups	146	60	86
Direct labor per unit	$51	$75		Quality control	$163,020	Number of inspections	1650	975	675
				Technical support	$106,522	Number of support calls	964	352	612
Estimated annual production	4000 units	9000 units		Total manufacturing overhead cost	$484,746
Estimated total manufacturing overhead:		$      484,746
Estimated total machine hours:		1,000
Calculate the predetermined overhead rate using traditional
volume-based costing
Calculate the total amount of overhead that would be assigned to each product line
using traditional volume-based costing
		EXPLORER
		CLIMBER
Calculate the gross margin per unit for each product line using traditional volume-based costing
		EXPLORER
		CLIMBER
Calculate the activity rate for each cost pool using activity-based costing
ACTIVITY	RATE
Machine maintenance
Batch setups
Quality control
Labor support
Calculate the total amount of overhead that would be assigned to each product line
using activity-based costing
		EXPLORER
		CLIMBER
Calculate the gross margin per unit for each product line using activity-based costing
		EXPLORER
		CLIMBER

Answer 1

Req 1.
OH rate:
Estimated Overheads			484,746
Divide: Estimated MH			1,000
OH rate per MH			484.75
Req 2.
OH assigned:
Explorer
Total MH useed			350
OH rate			484.75
OH applied			169662.5
Climber
Total MH useed			650
OH rate			484.75
OH applied			315087.5
Req 3.
Gross Profit:
			Explorer	Climber
Sales units			4,000	9000
Selling price			390	615
Sales revenue			1560000	5535000
Less: Cost
Material			368000	1035000
Labour			204000	675000
Overheads			169663	315087
Total cost			741663	2025087
Gross profits			818337	3509913
Req 4.
Activity rate:
STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL
			Activity	Total	Expected	Activity
ACTIVITY COST POOL			Measures	Overheads	Activity	Rate
Machine Maintenance			MH	78,840	1,000	78.84
Batch setups			Setups	136,364	146	934.00
Quality c ontrol			Inspections	163,020	1,650	98.80
Technical support			Support calls	106,522	964	110.50
Req 5.
Overheads allocated:
			Explorer		Climber
Activity		Rate	Activity	OH	Activity	OH
Machine Maintenance		78.84	350	27594	650	51246
Batch setups		934	60	56040	86	80324
Quality c ontrol		98.8	975	96330	675	66690
Technical support		110.5	352	38896	612	67626
		Total Overheads		218860		265886
req 6.
Gross profit
Gross Profit:
			Explorer	Climber
Sales units			4,000	9000
Selling price			390	615
Sales revenue			1560000	5535000
Less: Cost
Material			368000	1035000
Labour			204000	675000
Overheads			218860	265886
Total cost			790860	1975886
Gross profits			769140	3559114