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 next to 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 next to 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

1	Predetermined overhead Rate	Total estimated OH/Total estimated machine hours
		484746/1000
		484.746	Per machine hour
2	Calculation of assignment of OH
		Explorer	Climber
	OH assigned	169661.1	315084.9
3	Calculation of gross margin
		Explorer	Climber
	Sales price per unit	$1,560,000	$5,535,000
	Direct materials per unit	$368,000	$1,035,000
	Direct labor per unit	$204,000	$675,000
	Overhead cost	169661.1	315084.9
	Gross margin	$818,339	$3,509,915
4
	ACTIVITY	TOTAL COST	COST DRIVER	TOTAL	Activity Rate
	Machine maintenance	$78,840	Machine hours	1,000	$78.84	per machine hours
	Batch setups	$136,364	Setups	146	$934.00	Per batch setups
	Quality control	$163,020	Inspections	1,650	$98.80	per Inspections
	Technical support	$106,522	Technical support calls	964	$110.50	per techinal calls
	Total manufacturing overhead cost	$484,746