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 $ 121.00 $ 88.00 Direct materials per unit $ 64.70 $ 54.00 Direct labor per unit $ 10.80 $ 9.00 Direct labor-hours per unit 1.2 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 $ 2,020,000 Estimated total direct labor-hours 101,000 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) $ 606,000 30,000 71,000 101,000 Batch setups (setups) 693,000 360 270 630 Product sustaining (number of products) 700,000 1 1 2 Other 21,000 NA NA NA Total manufacturing overhead cost $ 2,020,000 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. Compute the product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system.

	Xtreme	Pathfinder	Total
Product Margin	537500	355000	892500

2

Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system

	Xtreme	Pathfinder	Total
Product Margin	211500	702000	913500

3

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

	Xtreme		Pathfinder		Total
	Amount	% of Total	Amount	% of Total	Amount
Traditional Cost System
Direct material	1617500	29.7%	3834000	70.3%	5451500
Direct Labor	270000	29.7%	639000	70.3%	909000
Manufacturing Overhead	600000	29.7%	1420000	70.3%	2020000
Total Cost Assigned to product	2487500		5893000		8380500

	Xtreme		Pathfinder		Total
Activities Based Costing System	Amount	% of Total	Amount	% of Total	Amount
Direct costs
Direct material	1617500	29.7%	3834000	70.3%	5451500
Direct Labor	270000	29.7%	639000	70.3%	909000
Indirect costs:
Supporting direct labor	180000	29.7%	426000	70.3%	606000
Batch setups	396000	57.1%	297000	42.9%	693000
Product sustaining	350000	50.0%	350000	50.0%	700000
Total cost assigned to products	2813500	33.7%	5546000	66.3%	8359500
Costs not assigned to products:
Other					21000
Total cost					8380500

Workings

	Xtreme	Pathfinder
Direct material	64.7	54
Direct Labor	10.8	9
Manufacturing Overhead	24	20
Total cost	99.5	83
Sales Price	121	88
Margin Per Unit	21.5	5
No of Units sold	25000	71000
Product Margin	537500	355000

ABC

	Cost	Activity	Activities Rate
Supporting direct labor	606000	101000	6
Batch setups	693000	630	1100
Product sustaining	700000	2	350000

		Xtreme		Pathfinder
	Activities Rate	Activity	Overhead Assigned	Activity	Overhead Assigned
Supporting direct labor	6	30000	180000	71000	426000
Batch setups	1100	360	396000	270	297000
Product sustaining	350000	1	350000	1	350000
			926000		1073000

	Xtreme	Pathfinder
Direct material	1617500	3834000
Direct Labor	270000	639000
Manufacturing Overhead	926000	1073000
Total Cost	2813500	5546000
Less Sales	3025000	6248000
Product Margin	211500	702000