Question

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): Activities and Activity Measures Supporting direct labor (direct labor-hours) Batch setups (setups ) Product sustaining (number of products) Other Total manufacturing overhead cost Estimated Expected Activity Overhead Cost Xtreme Pathfinder Total $ 693,100 43,500 76,000 119,500 539,000 290 200 490 640,000 1 39,900 NA NA NA $ 1,912,000 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. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Compute the product margins for the Xtreme and the Pathfinder products under the company's traditional costing system. (Round your intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.) Xtreme Pathfinder Total Product margin Required 1 Required 2 >

Answer 1

1. Product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system.
	Xtreme	Pathfinder	Total
Product margin       [Refer working note 1]	$464,000	$304,000	$768,000
2. Product margins for the Xtreme and the Pathfinder products under the company’s activity-based costing system.
	Xtreme	Pathfinder	Total
Product margin      [Refer working note 7]	$268,700	$539,200	$807,900

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3. Quantitative comparison of the traditional and activity-based cost assignments     [Refer working note 10]
	Xtreme		Pathfinder		Total
		% of		% of
	Amount	Total amount	Amount	Total amount	Amount
Traditional Cost System
Direct material	$1,856,000	32.0%	$3,952,000	68.0%	$5,808,000
Direct labor	$348,000	36.4%	$608,000	63.6%	$956,000
Manufacturing overhead	$696,000	36.4%	$1,216,000	63.6%	$1,912,000
Total costs assigned to products	$2,900,000		$5,776,000		$8,676,000
	Xtreme		Pathfinder		Total
		% of		% of
	Amount	Total amount	Amount	Total amount	Amount
Activity Based Costing System
Direct costs:
Direct material	$1,856,000	32.0%	$3,952,000	68.0%	$5,808,000
Direct labor	$348,000	36.4%	$608,000	63.6%	$956,000
Indirect costs:
Supporting direct labor         [Refer working note 8]	$252,300	36.4%	$440,800	63.6%	$693,100
Batch setups                          [Refer working note 8]	$319,000	59.2%	$220,000	40.8%	$539,000
Product sustaining                 [Refer working note 8]	$320,000	50.0%	$320,000	50.0%	$640,000
Total costs assigned to products	$3,095,300		$5,540,800		$8,636,100
Costs not assigned to products
Other               [Mentioned in question]					$39,900
Total cost            [$8,636,100 + $39,900]					$8,676,000

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Working note 1 - Calculation of profit margin under the company’s traditional costing system
	Xtreme	Pathfinder
Sales revenue                                                                    [Refer working note 2]	$3,364,000	$6,080,000
Less: Total direct material cost                                       [Refer working note 3]	$1,856,000	$3,952,000
Less: Total direct labor cost                                            [Refer working note 4]	$348,000	$608,000
Less: Manufacturing overhead allocated or applied         [Refer working note 5]	$696,000	$1,216,000
Product margin	$464,000	$304,000

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Working note 2 - Calculation of total sales revenue
	Xtreme	Pathfinder
Selling price per unit                                  (a)	$116	$80
Number of units produced / Sold                (b)	29,000	76,000
Total sales revenue                                   (a x b)	$3,364,000	$6,080,000

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Working note 3 - Calculation of total direct material cost
	Xtreme	Pathfinder
Direct material cost per unit              (a)	$64	$52
Number of units produced / Sold               (b)	29,000	76,000
Total direct material cost                 (a x b)	$1,856,000	$3,952,000

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Working note 4 - Calculation of total direct labor cost
	Xtreme	Pathfinder
Direct labor cost per unit                      (b)	$12	$8
Number of units produced                      (b)	29,000	76,000
Total direct labor cost                    (a x b)	$348,000	$608,000

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Working note 5 - Calculation of overhead cost allocated to each product
	Xtreme	Pathfinder
Actual number of direct labor hours                               (a)	43,500	76,000
Predetermined overhead rate [refer working note 6]     (b)	$16	$16
Overhead assigned                                                        (a x b)	$696,000	$1,216,000

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Working note 6 - Calculation of predetermined overhead rate
Estimated total manufacturing overhead       (a)	$1,912,000
Estimated total direct labor hours                (b)	119,500
Predetermined overhead rate                     (a / b)	$16.00	per direct labor hour

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Working note 7 - Calculation of profit margin under the company’s activity based costing system.
	Xtreme	Pathfinder
Sales revenue                                                                    [Refer working note 2]	$3,364,000	$6,080,000
Less: Total direct material cost                                       [Refer working note 3]	$1,856,000	$3,952,000
Less: Total direct labor cost                                            [Refer working note 4]	$348,000	$608,000
Less: Manufacturing overhead allocated or applied         [Refer working note 8]	$891,300	$980,800
Product margin	$268,700	$539,200

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Working note 8 - Allocation of Estimated Overhead to both the products using activity rates:
Activities and Activity Measures	Activity Rate [Refer working note 9]		Xtreme			Pathfinder
			Total expected activity		Allocation	Total expected activity		Allocation
	(a)		(b)		(a x b)	(c)		(a x c)
Supporting direct labor	$5.80	per direct labor hour	43,500	direct labor-hours	$252,300	76,000	direct labor-hours	$440,800
Batch setups	$1,100.00	per setup	290	setups	$319,000	200	setups	$220,000
Product sustaining	$320,000.00	per product	1		$320,000	1	number of products	$320,000
Total overhead allocated					$891,300			$980,800

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Working note 9 - Calculation of Activity rate
Activities and Activity Measures	Estimated overhead cost	Total expected activity		Activity rate
	(a)	(b)		( a / b)
Supporting direct labor	$693,100	119,500	direct labor-hours	$5.80	per direct labor hour
Batch setups	$539,000	490	setups	$1,100.00	per setup
Product sustaining	$640,000	2	Products	$320,000.00	per product

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Working note 10 - Computation of % of total amount
Traditional Cost System:
	Total amount	Xtreme		Pathfinder
		Amount	% of Total amount	Amount	% of Total amount
	(a)	(b)	(b/a) x 100	(c)	(c/a) x 100
Direct material	$5,808,000	$1,856,000	31.96%	$3,952,000	68.04%
Direct labor	$956,000	$348,000	36.40%	$608,000	63.60%
Manufacturing overhead	$1,912,000	$696,000	36.40%	$1,216,000	63.60%
Activity Based Costing System:
	Total amount	Xtreme		Pathfinder
		Amount	% of Total amount	Amount	% of Total amount
	(a)	(b)	(b/a) x 100	(c)	(c/a) x 100
Direct costs:
Direct material	$5,808,000	$1,856,000	31.96%	$3,952,000	68.04%
Direct labor	$956,000	$348,000	36.40%	$608,000	63.60%
Indirect costs:
Supporting direct labor         [Refer working note 8]	$693,100	$252,300	36.40%	$440,800	63.60%
Batch setups                          [Refer working note 8]	$539,000	$319,000	59.18%	$220,000	40.82%
Product sustaining                 [Refer working note 8]	$640,000	$320,000	50.00%	$320,000	50.00%

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