Smoky Mountain Corporation makes two types of hiking boots—Xtreme and the Pathfi

Question

Smoky Mountain Corporation makes two types of hiking boots—Xtreme and the Pathfinder. Data concerning these two product lines appear below:

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:

Compute the product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system. (Round your intermediate calculations to 2 decimal places.)

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):

Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system. (Negative product margins should be indicated with a minus sign. Round your intermediate calculations to 2 decimal places.)

Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Do not round intermediate calculations. Round your "Percentage" answer to 1 decimal place. (i.e. .1234 should be entered as 12.3))

Smoky Mountain Corporation makes two types of hiking boots—Xtreme and the Pathfinder. Data concerning these two product lines appear below:

Explanation / Answer

Solution: 1. The product margins using the traditional approach Xtreme Pathfinder Total Product margin $220,000 $1,400,000 $1,620,000 Working Notes: Using traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours using the predetermined overhead rate Predetermined overhead rate = Estimated total manufacturing overhead cost / Estimated total direct labor-hours =$1,980,000/120,000 DLHs =$16.50 per DLHs Xtreme Pathfinder Total Sales $2,800,000 $7,920,000 $10,720,000 a [$140 x 20,000] [80,000 x $99 ] Direct materials $1,440,000 $4,240,000 $5,680,000 b [$72 x 20,000] [80,000 x $53] Direct labor $480,000 $960,000 $1,440,000 c [$24 x 20,000] [80,000 x $12] Manufacturing overhead     applied @ $16.50 per DLHs $660,000 $1,320,000 $1,980,000 d [20,000 x 2 x 16.50] [80,000 x 1 x 16.50] Total manufacturing cost $2,580,000 $6,520,000 $9,100,000 e=b+c+d Product margin $220,000 $1,400,000 $1,620,000 f=a-e 2. Activity-based costing system Xtreme Pathfinder Total Product margin ($12,400) $1,731,400 $1,719,000 Working Notes: Under Activity-based costing system determination of the activity rates: a b c=a/b   Activity Cost Pool Total cost Total activity Activity Rate   Supporting direct labor 783,600 120,000 6.53 per DLH   Batch setups 495,000 300 1650 per setup   Product sustaining 602,400 2 301,200 per product Now the product margins would be computed as follows: Xtreme Pathfinder Total Sales $2,800,000 $7,920,000 $10,720,000 a [$140 x 20,000] [80,000 x $99 ] Direct materials $1,440,000 $4,240,000 $5,680,000 b [$72 x 20,000] [80,000 x $53] Direct labor $480,000 $960,000 $1,440,000 c [$24 x 20,000] [80,000 x $12] Supporting direct labor 261,200 522,400 783,600 d [40,000 x 6.53 ] [80,000 x 6.53 ] Batch setups 330,000 165,000 495,000 e [200 x 1650 ] [100 x 1650 ] Product sustaining 301,200 301,200 602,400 f [1 x 301,200 ] [1 x 301,200 ] Total cost $2,812,400 $6,188,600 $9,001,000 g=b+c+d+e+f Product margin ($12,400) $1,731,400 $1,719,000 h=a-g Notes: Other product cost are not allocated as they represents idle capacity cost which is not assigned to product cost 3. Xtreme Pathfinder Total Amount % of total amount Amount % of total amount Traditional Cost System Direct materials $1,440,000 25.4% $4,240,000 74.6% $5,680,000 Direct labor $480,000 33.3% $960,000 66.7% $1,440,000 Manufacturing overhead $660,000 33.3% $1,320,000 66.7% $1,980,000 Total manufacturing cost $2,580,000 $6,520,000 $9,100,000 Xtreme Pathfinder Total Amount % of total amount Amount % of total amount Activity-Based Costing System Direct costs: Direct materials $1,440,000 25.4% $4,240,000 74.6% $5,680,000 Direct labor $480,000 33.3% $960,000 66.7% $1,440,000 Indirect costs: Supporting direct labor 261,200 33.3% 522,400 66.7% 783,600 Batch setups 330,000 66.7% 165,000 33.3% 495,000 Product sustaining 301,200 50.0% 301,200 50.0% 602,400 Total cost assigned to products $2,812,400 $6,188,600 $9,001,000 Costs not assigned to products Other 99,000 Total Cost $9,100,000 Working Notes: a b=(a/e)x 100% c d=(c/e) x 100% e Xtreme Pathfinder Total Amount % of total amount Amount % of total amount Traditional Cost System Direct materials $1,440,000 25.4% $4,240,000 74.6% $5,680,000 Direct labor $480,000 33.3% $960,000 66.7% $1,440,000 Manufacturing overhead $660,000 33.3% $1,320,000 66.7% $1,980,000 Total manufacturing cost $2,580,000 $6,520,000 $9,100,000 a b=(a/e)x 100% c d=(c/e) x 100% e Xtreme Pathfinder Total Amount % of total amount Amount % of total amount Activity-Based Costing System Direct costs: Direct materials $1,440,000 25.4% $4,240,000 74.6% $5,680,000 Direct labor $480,000 33.3% $960,000 66.7% $1,440,000 Indirect costs: Supporting direct labor 261,200 33.3% 522,400 66.7% 783,600 Batch setups 330,000 66.7% 165,000 33.3% 495,000 Product sustaining 301,200 50.0% 301,200 50.0% 602,400 Total cost assigned to products $2,812,400 $6,188,600 $9,001,000 Costs not assigned to products Other 99,000 Total Cost $9,100,000 Please feel free to ask if anything about above solution in comment section of the question.

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