Question

Chapter 7

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 $ 141.00 $ 64.50 $ 17.00 1.7 DLHS 23,000 units $ $ $ Pathfinder 91.00 52.00 10.00 1.0 DLHs 74,000 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 $ 2,714,400 113,100 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): Estimated Overhead Cost $ 791,700 1,062,000 790,000 70,700 $ 2,714,400 Activities and Activity Measures Supporting direct labor (direct labor-hours) Batch setups (setups) Product sustaining (number of products) Other Total manufacturing overhead cost 340 Expected Activity Xtreme Pathfinder Total 39,100 74,000 113,100 250 590 1 NA NA 1 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.

Required 1

Required 2

Required 3

Answer 1

Answers 1 Product Margin under Traditional Costing Xtremel Pathfinder Prodcut Margin 430100 370000 2 Product Margin under Activity Based costing Xtreme | Pathfinder Prodcut Margin 87800 783000 Total 800100 Total 870800

3. Quantitative Comparision of the Traditional and Activity Based Cost Assignments Quantitative comparsion of the Traditional Cost Xtreme Pathfinder Total Traditional Costing System Amount % Amount 1 % Direct Material 1483500 27.8% 3848000 72.2% 5331500 DirectLabor 391000 34.6% 740000 65.4% 1131000 Manufacturing Overheads 938400 34.6% 1776000 65.4% 2714400 Cost Assigned to Prodcut 2812900 6364000 9176900 Quantitative Comparison of Acticity Based Cost Assignments Xtreme Pathfinder Total Activty Based Costing System Amount | % Amount || Direct Cost Direct Material 1 483500 27.8% 3848000 72.2% 5331500 Direct Labor 391000 34.6% 740000 65.4% 1131000 Indirect Cost Supporing direct Labor 273700 34.6% 518000 65.4% 791700 Batch setup 612000 57.6% 450000 42.4% 1062000 Prodcut Sustainind 395000 50.0% 395000 50.0% 790000 Total Cost Assigned to Products 3155200 5951000 9106200 Cost Not asigned to the Products Other 70700 Total Cost 9176900

Working Notes Xtreme Selling Price 141.00 Direct Material 64.50 Direct Labor 17.00 Dirct Labou hour Per unit 1.70 Estimated Production 23000 Pathfinder 91.00 52.00 10.00 1.00 74000 Estimated MOH Estimated Labor hours Predetermined Overhead Rate Total Direct Labor Hours = (Units * Direct Labor Hour) 2714400 113100 24.00 2714400/113100 Xtreme Pathfinder Total 39100 74000 113100 Traditional Costing System Xtreme Pathfinder Total sales 3243000 67340009977000 Direct Material 1483500 3848000 5331500 Direct Labor 391000 740000 1131000 Manufacturing Overheads 938400 1776000 2714400 Total Manufacturing Cost 2812900 6364000 9176900 Product Margin 430100 370000 800100

Determination of Activity Rate Activty Pool Estimated OH Supporing direct Labor 791700 Batch setup 1062000 Prodcut Sustainind 790000 Base Activity Rate 113100 7.00 590 1800 2 395000 Activity Based Costing System Xtreme Pathfinder Total sales 3243000 6734000 9977000 Direct Material 1483500 3848000 5331500 Direct Labor 391000 740000 1131000 Supporing direct Labor 273700 5180001 791700 Batch setup 612000 450000 1062000 Prodcut Sustainind 395000 395000 790000 Total Cost 3155200 5951000 9106200 Product Margin 87800 783000 870800