Question

Smoky Mountain Corporation makes two types of hiking boots-the Xtreme and the Pathfinder. Data concerning these two product lines appear below: 

Pathfinder Selling price per unit Direct materials per unit Direct labor per unit Direct labor-hours per unit Estimated annual production and sales Xtreme $140.00 $72.00 $24.00 2.0 DLHS 20,000 units $99.00 $53.00 $12.00 1.0 DLHS 80,000 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  $1,980,000 

Estimated total direct labor-hours  120.000 DLHS 

Required: 

1. Using Exhibit 5-13 as a guide, 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):

Xtreme 40,000 200 Expected Activity Pathfinder 80,000 Total 120,000 300 100 Activities and Activity Measures Supporting direct labor (direct labor-hours) Batch setups (setups) Product sustaining (number of products) Other Total manufacturing overhead cost Estimated Overhead Cost S 783,600 495,000 602,400 99,000 $1,980,000 NA NA ΝΑ 

Using Exhibit 5-11 as a guide, compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system. 

3. Using Exhibit 5-14 as a guide, prepare a quantitative comparison of the traditional and activity-based cost assignments. Explain why the traditional and activity-based cost assignments differ.

Answer 1

1)	overhead rate
	estimated MOH/estimated DLH's
	1980,000/120,000
	16.5	per direct labor hour
	product margin
				Xtreme	pathfinder	total
	sales			2800000	7920000
	less:Expense
	Direct materials			1440000	4240000
	Direct labor			480000	960000
	overhead			660000	1320000
	total cost			2580000	6520000
	product margin			220000	1400000	1620000
				Xtreme	pathfinder	total
	product margin			220000	1400000	1620000	answer
2)	overhead rate					oh rate
				amount	driver
	Activity
	Supporting direct labor			783,600	120,000	6.53
	batch setups			495,000	300	1650
	product sustaining			602,400	2	301200
	allocation of overhead and per unit cost
				Xtremet		Pathfinder
			Rate	driver	OH	Rate	Driver	OH
	Activity
	Supporting direct labor		6.53	40,000	261200	6.53	80,000	522400
	batch setups		1650	200	330000	1650	100	165000
	product sustaining		301200	1	301200	301200	1	301200
	total overhead				892400			988600
	product margin
				Xtreme	pathfinder	total
	Selling price per unit			2800000	7920000
	less:Expense
	Direct materials			1440000	4240000
	Direct labor			480000	960000
	total overhead			892400	988600	1881000
	total cost			2812400.00	6188600.00
	product margin			-12400.00	1731400.00	1719000.00
				Xtreme	pathfinder	total
	product margin			-12400	1731400	1719000	answer
	3)			Xtreme		Pathfinder		total
					% of		% of
				Amount	total amount	Amount	total amount	Amount
	Traditional Cost system
	Direct materials			1440000	25.4%	4240000	74.6%	5680000
	direct labor			480000	33.3%	960000	66.7%	1440000
	manufacturing overhead			660000	33.3%	1320000	66.7%	1980000
	total cost assigned to produts			2580000		6520000		9100000
				Xtreme		Pathfinder		total
					% of		% of
				Amount	total amount	Amount	total amount	Amount
	Activity based
	Direct materials			1440000	25.4%	4240000	74.6%	5680000
	direct labor			480000	33.3%	960000	66.7%	1440000
	indirect costs
	Supporting direct labor			261200	33.3%	522400	66.7%	783600
	batch setups			330000	66.7%	165000	33.3%	495000
	product sustaining			301200	50.0%	301200	50.0%	602400
	total cost assigned to products			2812400		6188600		9001000
	costs not assigned to products
	other							99,000
	total cost.							9100000