Question

Smoky Mountain Corporation makes two types of hiking boots--the Xtreme and the Pathfinder. Data concerning these two product lines appear below: Selling price per unit Direct materials per unit Direct labor per unit Direct labor-hours per unit Estimated annual production and sales $ 88.00 $ 53.00 8.00 1.0 DLRS 70,000 unit 1.8 DLHS 23,000 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 Estimated total direct labor-hours $ 2,005,200 111.400 DLS 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 (setupa) Product sustaining number of products) Other Total manufacturing overhead cost Estimated Expected Activity Overhead Coat Xtreme Pathfinder Total $ 712,960 41.400 70.000 111,400 504.000 210 190 420 740,000 48.240 $ 2,005,200 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.

Answer 1

1
Predetermined overhead rate =	Estimated total manufacturing overhead cost/Estimated total direct labor hours
	= 2005200/111400
	18	Per DLH
	23000 @ 1.8DLH per unit + 70000 @ 1 DLH
	111400
	Consequently, the product margins using the traditional approach would be computed as follows:
	Xtreme	Pathfinder	Total
Sales	2852000	6160000	9012000
Direct material	1458200	3710000	5168200
Direct labor	331200	560000	891200
MOH applied @ 20 per DLH 23000*1.8*20	745200	1260000	2005200
Total Manuacturing Cost	2534600	5530000	8064600
Product margin	317400	630000	947400
2
The first step is to determine the activity rates:
Activity Cost pool	Total Cost	Total Activity	Activity Rate
Supporting direct labor	712960	111400	6.4
Batch setups	504000	420	1200
Product sustaining	740000	2	370000
Under the activity-based costing system, the product margins would be computed as follows:
	Xtreme	Pathfinder	Total
Sales	2852000	6160000	9012000
DM	1458200	3710000	5168200
DL	331200	560000	891200
Supporting DL 6.4*23000	147200	448000	595200
Bath Setups	276000	228000	504000
Product sustaining	370000	370000	740000
Total cost	2582600	5316000	7898600
Product margin	269400	844000	1113400
3
Quantitative comparison
Traditional Cost System	Xtreme	Pathfinder
DM	28.21%	71.79%
DL	37.16%	62.84%
MOH	37.16%	62.84%
Activity-Based Costing System
DM	28.21%	71.79%
DL	37.16%	62.84%
Indirect Costs
Supporting DL	24.73%	75.27%
Bath Setups	54.76%	45.24%
Product sustaining	50.00%	50.00%
Example
	1458200	3710000	5168200
1458200/5168200 = 28.21%
3710000/5168200 = 71.79%