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 Xtreme $ 124.00 $ 63.40 $ 14.40 1.8 DLHS 23,000 units Pathfinder $ 88.00 $ 53.00 $ 8.00 1.0 DLHS 70,000 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 $ 2,605,200 111,400 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): 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 $ 712,960 504,000 740,000 48,240 $ 2,005, 200 Expected Activity Xtreme Pathfinder Total 41,400 70,000 111,400 230 190 420 1 1 2 NA NA NA 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.

Please find the right answers to the incorrect ones.

Answer 1

Solution 1:

Overhead rate = 2005200 / 111400 = $18 per DLH

Computation of Product Margin - Traditional Costing System
Particulars	Xtreme	Pathfinder	Total
Selling price per unit	$124.00	$88.00
Direct material per unit	$63.40	$53.00
Direct labor per unit	$14.40	$8.00
Manufacturing overhead cost per unit (Direct labor hours per unit* $18)	$32.40	$18.00
Product Margin per unit	$13.80	$9.00
Nos of units sold	23000	70000
Total Margin (Product margin per unit * Nos of unit sold)	$3,17,400	$6,30,000	$9,47,400

Solution 2:

Determination of activity rate for each activity & allocation of overhead
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Xtreme		Pathfinder
					Usage	Allocated Costs	Usage	Allocated Costs
Supporting direct labor cost	$7,12,960.00	Direct Labor hours	111400	$6.40	41400	$2,64,960.00	70000	$4,48,000.00
Batch Setups	$5,04,000.00	Setups	420	$1,200.00	230	$2,76,000.00	190	$2,28,000.00
Product sustaining	$7,40,000.00	Number of products	2	$3,70,000.00	1	$3,70,000.00	1	$3,70,000.00
Other	$48,240.00	No allocation
Total	$20,05,200.00					$9,10,960.00		$10,46,000.00
Nos of units						23000		70000
Allocated overhead per unit						$39.61		$14.94

Computation of Product Margin - Activity based Costing System
Particulars	Xtreme	Pathfinder	Total
Selling price per unit	$124.00	$88.00
Direct material per unit	$63.40	$53.00
Direct labor per unit	$14.40	$8.00
Allocated Manufacturing overhead cost per unit	$39.61	$14.94
Product Margin per unit	$6.59	$12.06
Nos of units sold	23000	70000
Total Margin (Product margin per unit * Nos of unit sold)	$1,51,640	$8,44,000	$9,95,640

Solution 3:

Quantity comparison of traditional cost assignment
Particulars	Xtreme		Pathfinder		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Material Cost	$14,58,200.00	28.21%	$37,10,000.00	71.79%	$51,68,200.00
Direct Labor Cost	$3,31,200.00	37.16%	$5,60,000.00	62.84%	$8,91,200.00
Manufacturing Overhead cost	$7,45,200.00	37.16%	$12,60,000.00	62.84%	$20,05,200.00
Total Cost assigned to Product	$25,34,600.00		$55,30,000.00		$80,64,600.00
Quantity comparison of Activity Based cost assignment
Particulars	Xtreme		Pathfinder		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Cost:
Direct Material Cost	$14,58,200.00	28.21%	$37,10,000.00	71.79%	$51,68,200.00
Direct Labor Cost	$3,31,200.00	37.16%	$5,60,000.00	62.84%	$8,91,200.00
Indirect Cost:
Supporting direct labor cost	$2,64,960.00	37.16%	$4,48,000.00	62.84%	$7,12,960.00
Batch Setups	$2,76,000.00	54.76%	$2,28,000.00	45.24%	$5,04,000.00
Product sustaining	$3,70,000.00	50.00%	$3,70,000.00	50.00%	$7,40,000.00
Total Cost Assigned to Products	$27,00,360.00		$53,16,000.00		$80,16,360.00
Cost not assigned to products:
Others					$48,240.00
Total Cost					$80,64,600.00