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 $ 120.de $ 63.60 $ 12.00 1.2 DLHS 25,000 units Pathfinder $ 87.00 $ 55.00 $ 10.00 1. B DLHS 72,000 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 $ 2.000, 102.00 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 orghinization-sustaining costs and idle capacity costs < Prev 3 of 3 ! Next > 10:14 PM o e 9

Answer 1

Solution 1:

Overhead Allocation - Traditional Costing System
Particulars	Xtreme	Pathfinder	Total
Estimated annual Production (In units)	25000	72000
Direct Labour Hours Per unit	1.2	1
Total Direct Labour Hours	30000	72000	102000
Overhead Cost Allocation basis direct labour hours (Overhead / Total hours * Labor hours of model)	$600,000.00	$1,440,000.00	$2,040,000.00
Manufacturing overhead cost per unit (Allocated Overhead / Nos of units)	$24.00	$20.00

Computation of Product Margin - Traditional Costing System
Particulars	Xtreme	Pathfinder	Total
Selling price per unit	$120.00	$87.00
Direct material per unit	$63.60	$55.00
Direct labor per unit	$12.00	$10.00
Manufacturing overhead cost per unit	$24.00	$20.00
Product Margin per unit	$20.40	$2.00
Nos of units sold	25000	72000
Total Margin (Product margin per unit * Nos of unit sold)	$510,000.00	$144,000.00	$654,000.00

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	$622,200.00	Direct Labor hours	102000	$6.10	30000	$183,000.00	72000	$439,200.00
Batch Setups	$644,000.00	Setups	460	$1,400.00	250	$350,000.00	210	$294,000.00
Product sustaining	$700,000.00	Number of products	2	$350,000.00	1	$350,000.00	1	$350,000.00
Other	$73,800.00	No allocation
Total	$2,040,000.00					$883,000.00		$1,083,200.00
Nos of units						25000		72000
Allocated overhead per unit						$35.32		$15.04

Computation of Product Margin - Activity based Costing System
Particulars	Xtreme	Pathfinder	Total
Selling price per unit	$120.00	$87.00
Direct material per unit	$63.60	$55.00
Direct labor per unit	$12.00	$10.00
Allocated Manufacturing overhead cost per unit	$35.32	$15.04
Product Margin per unit	$9.08	$6.96
Nos of units sold	25000	72000
Total Margin (Product margin per unit * Nos of unit sold)	$227,000.00	$500,800.00	$727,800.00

Solution 3:

Quantity comparison of traditional cost assignment
Particulars	Xtreme		Pathfinder		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Material Cost	$1,590,000.00	28.6%	$3,960,000.00	71.4%	$5,550,000.00
Direct Labor Cost	$300,000.00	29.4%	$720,000.00	70.6%	$1,020,000.00
Manufacturing Overhead cost	$600,000.00	29.4%	$1,440,000.00	70.6%	$2,040,000.00
Total Cost assigned to Product	$2,490,000.00		$6,120,000.00		$8,610,000.00

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	$1,590,000.00	28.6%	$3,960,000.00	71.4%	$5,550,000.00
Direct Labor Cost	$300,000.00	29.4%	$720,000.00	70.6%	$1,020,000.00
Indirect Cost:
Supporting direct labor cost	$183,000.00	29.4%	$439,200.00	70.6%	$622,200.00
Batch Setups	$350,000.00	54.3%	$294,000.00	45.7%	$644,000.00
Product sustaining	$350,000.00	50.0%	$350,000.00	50.0%	$700,000.00
Total Cost Assigned to Products	$2,773,000.00		$5,763,200.00		$8,536,200.00
Cost not assigned to products:
Others					$73,800.00
Total Cost					$8,610,000.00