Question

Smoky Mountain Corporation makes two types of hiking boots-the Xtreme and the Pathfinder. Data concerning these two product lines appear below Xtreme $120.00 $ 63.50 $ 13.50 1.5 DLHS 24,000 units Pathfinder $ 92.00 $ 54.00 $ 9.00 1.0 DLHS 71,000 units Selling price per unit Direct materials per unit Direct labor per unit Direct labor-hours per unit Estimated annual production and sales The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours Data conceming manufacturing overhead and direct labor-hours for the upcoming year appear below: $2,033,000 Estimated total manufacturing overhead Estimated total direct labor-hours 107,000 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): Expected Activity Total Estimated Overhead Cost xtrene Pathfinder 36, 000 240 1 NA Activities and Activity Measures Supporting direct labor (direct labor-hours) Batch setups (setups) Product sustaining (number of products)i Other 107,000 440 2 71,000 200 663,400 572,000 750, 000 47,600 $2,033,000 NA NA Total manufacturing overhead cost Compute the product marains for the Xtreme and the Pathfinder products under the activitv-based costing svstem.

Answer 1

Part - 1)

Predetermined rate of overhead = Estimated cost of manufacturing overheads/Estimated direct labour

= $2,033,000/[(24000*1.5) + (71,000*1)

= $2,033,000/107,000

= $19

The computation of product margin is done as follows by using the following formula in excelsheet:

Xtreme Pathfinder 92 71000 Computation of product margin 2 Particulars 3 Selling price 120 4 Units sold 24000 5 Direct material price 63.5 6 Direct labor price 13.5 7 Per unit direct labor hours 1.5 8 Predetermined rate of overheads 9 Revenue =B3 B4 10 Less: Direct material =B4*B5 11 Less: Direct labor =B4*B6 12 Less: Manufacturing overhead @ 19 per labor hour =B4*B7*B8 13 Poruct margin =B9-B10-B11-B12 14 =C3*C4 =C4*C5 =C4*C6 =C4*07*08 =C9-C10-C11-C12

The product margin computed after using the above formulas is as follows:

Pathfinder 92 71000 54 9 А Computation of product margin 2 Particulars Xtreme 3 Selling price 120 4 Units sold 24000 5 Direct material price 63.5 6 Direct labor price 5 113. 7 Per unit direct labor hours 1.5 8 Predetermined rate of overheads 19 9 Revenue =B3*B4 10 Less: Direct material =B4*B5 11 Less: Direct labor =B4*B6 12 Less: Manufacturing overhead @ 19 per labor hour =B4*B7*B8 13 Poruct margin =B9-B10-B11-B12 14 1 19 =C3*C4 =C4*C5 =C4*C6 =C4*C7*C8 =C9-C10-C11-C12

Part - 2)

The product margin through ABC system is computed by using the following formula in the excel sheet:

Activity rates =B3/C3 =B4/C4 =B5/C5 92 B 1 Computation of activity rates: 2 Cost pools Estimated total cost Estimated total activity 3 Supporting direct labor 663400 107000 4 Batch set ups 572000 440 5 Product sustaining 750000 6 7 8 Computation of product margin using ABC system 9 Particulars Xtreme Pathfinder 10 Selling price 120 11 Units sold 24000 71000 12 Direct material price 13 Direct labor price 13.5 14 Per unit direct labor hours 1.5 15 Revenue =B10*B11 =C10*c11 16 Less: Direct material =B11*B12 =C11*C12 17 Less: Direct labor =B11*B13 =C11*C13 18 Less: Supporting direct labors =B11*B14*D3 =C11*c14*D3 19 Less: Batch set ups =D4*240 =D4*200 20 Less: Product sustaining cost =D5 =D5 21 Product margin =B15- SUM(B16:B20) =C15- SUM(C16:C20) 63.5 22

The product margin through ABC system is computed by using the above excel formula:

B 1 2 Cost pools 3 Supporting direct labor 4 Batch set ups 5 Product sustaining D Computation of activity rates: Estimated total cost Estimated total activity Activity rates 663400 107000 6.2 572000 440 1300 750000 2 375000 6 i 71000 9 7 8 Computation of product margin using ABC system 9 Particulars Xtreme Pathfinder 10 Selling price 120 11 Units sold 24000 12 Direct material price 63.5 13 Direct labor price 13.5 14 Per unit direct labor hours 1.5 15 Revenue 2880000 16 Less: Direct material 1524000 17 Less: Direct labor 324000 18 Less: Supporting direct labors 223200 19 Less: Batch set ups 312000 20 Less: Product sustaining cost 375000 21 Product margin 121800 22 6532000 3834000 639000 440200! 260000 375000 983800

Part - 3)

The quantitative comparison of the product margin of ABC system and traditional system is shown as follows in the excel sheet by the following formula:

Activity rates =B3/C3 =B4/C4 =B5/C5 92 B 1 Computation of activity rates: 2 Cost pools Estimated total cost Estimated total activity 3 Supporting direct labor 663400 107000 4 Batch set ups 572000 440 5 Product sustaining 750000 6 7 8 Computation of product margin using ABC system 9 Particulars Xtreme Pathfinder 10 Selling price 120 11 Units sold 24000 71000 12 Direct material price 13 Direct labor price 13.5 14 Per unit direct labor hours 1.5 15 Revenue =B10*B11 =C10*c11 16 Less: Direct material =B11*B12 =C11*C12 17 Less: Direct labor =B11*B13 =C11*C13 18 Less: Supporting direct labors =B11*B14*D3 =C11*c14*D3 19 Less: Batch set ups =D4*240 =D4*200 20 Less: Product sustaining cost =D5 =D5 21 Product margin =B15- SUM(B16:B20) =C15- SUM(C16:C20) 63.5 22

The quantitative comparison of the product margin of ABC system and traditional system is shown as follows by using the above formula:

B 1 2 Cost pools 3 Supporting direct labor 4 Batch set ups 5 Product sustaining D Computation of activity rates: Estimated total cost Estimated total activity Activity rates 663400 107000 6.2 572000 440 1300 750000 2 375000 6 i 71000 9 7 8 Computation of product margin using ABC system 9 Particulars Xtreme Pathfinder 10 Selling price 120 11 Units sold 24000 12 Direct material price 63.5 13 Direct labor price 13.5 14 Per unit direct labor hours 1.5 15 Revenue 2880000 16 Less: Direct material 1524000 17 Less: Direct labor 324000 18 Less: Supporting direct labors 223200 19 Less: Batch set ups 312000 20 Less: Product sustaining cost 375000 21 Product margin 121800 22 6532000 3834000 639000 440200! 260000 375000 983800