Question

Problem 7-17 Comparing Traditional and Activity-Based Product Margins [L07-1, LO7-3, LO7-4, LO7-5] Smoky Mountain Corporation makes two types of hiking boots-the Xtreme and the Pathfinder. Data concerning these two product lines appear below: Xtreme Pathfinder $ 91.00 $ 50.00 $ 130.00 $ 64.30 $ 11.20 Selling price per unit Direct materials per unit Direct labor per unit Direct labor-hours per unit Estimated annual production and sales 8.00 1.4 DLHS 1.0 DLHS 21,000 units 72,000 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 $2,230,800 101,400 DLHS Estimated total direct labor-hours 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 Expected Activity Activities and Activity Measures Supporting direct labor (direct labor-hours) Batch setups (setups) Product sustaining (number of products) overhead Cost Xtreme Pathfinder Total 72,000 230 699,660 29,400 101,400 660,000 780,000 91,140 320 550 1 1 2 Other NA NA NA $ 2,230,800 Total manufacturing overhead cost

Answer 1

Answers 1 Product Margin under Traditional Costing Xtreme | Pathfinder Prodcut Margin 497700 792000 2 Product Margin under Activity Based costing Xtreme Pathfinder Prodcut Margin 167640 1213200 Total 1289700 Total 1380840

Working Notes Xtreme Pathfinder Selling Price 130.00 91.00 Direct Material 64.301 50.000 Direct Labor 11.20 8.00 Dirct Labou hour Per unit 1.401 1.00 Estimated Production 210001 720001 Estimated MOH Estimated Labor hours Predetermined Overhead Rate Total Direct Labor Hours = (Units * Direct Labor Hour) 2230800 101400 22.00 2033000/107000 Xtreme Pathfinder Total 29400 7 2000 1 01400 Traditional Costing System Xtreme P athfinder Total sales 2730000 6552000 9282000 Direct Material 1350300 360000014950300 Direct Labor 235200 576000 811200 Manufacturing Overheads 646800 1584000 2230800 Total Manufacturing Cost 2232300 5760000 79923001 Product Margin 497700 792000 1289700

Determination of Activity Rate Activty Pool Estimated OH Supporing direct Labor 699660 Batch setup 660000 Prodcut Sustainind 780000 Base Activity Rate 101400 6.90 550 1200 2 390000 Activity Based Costing System Xtreme Pathfinder Total sales 2730000 6552000 9282000 Direct Material 1350300 3600000 4950300 Direct Labor 235200 576000 811200 Supporing direct Labor 202860 496800 699660 Batch setup 384000 276000 660000 Prodcut Sustainind 390000 390000 780000 Total Cost 2562360 5338800 7901160 Product Margin 167640 1213200 1380840