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

Question

Smoky Mountain Corporation makes two types of hiking boots—the 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:

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):

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.

Xtreme Pathfinder Selling price per unit $ 128.00 $ 90.00 Direct materials per unit $ 63.10 $ 50.00 Direct labor per unit $ 12.00 $ 8.00 Direct labor-hours per unit 1.5 DLHs 1.0 DLHs Estimated annual production and sales 20,000 units 70,000 units

Explanation / Answer

1 1. Under the traditional direct labor-hour based costing system, manufacturing overhead is applied to products using the predetermined over- head rate computed as follows: Predetermined Overhead rate = Estimated total manufacturing overhead cost ÷ Estimated total direct labor - hours $2,100,000 ÷ 100,000 DLHs* = = 21.00 per DLH *20,000 units of Xtreme @ 1.50 DLH per unit + 70,000 units of the Pathfinder@ 1.0 DLH per unit = 30,000 DLHs + 70,000 DLHs = 100,000 DLHs. Consequently, the product margins using the traditional approach would be computed as follows: Xtreme Pathfinder Total Sales $2,560,000 $6,300,000 $8,860,000 Direct materials 1,262,000 3,500,000 4,762,000 Direct labor 240,000 560,000 800,000 Manufacturing overhead applied @ $21.00 per direct labor-hour 630,000 1,470,000 2,100,000 Total manufacturing cost 2,132,000 5,530,000 7,662,000 Product margin $428,000 $770,000 $1,198,000 Note that all of the manufacturing overhead cost is applied to the products under the company’s traditional costing system. 2 The first step is to determine the activity rates: (a) ÷ (b) Activity Cost Pools (a) Total Cost (b)Total Activity Activity Rate Supporting direct labor $745,000 100,000 DLH $7.45 per DLH Batch setups $612,000 360 setups $1,700 per setup Product sustaining $700,000 2 products $350,000 per product *The Other activity cost pool is not shown above because it includes organization-sustaining and idle capacity costs that should not be assigned to products. Under the activity-based costing system, the product margins would be computed as follows: Xtreme Pathfinder Total Sales $2,560,000 $6,300,000 $8,860,000 Direct materials 1,262,000 3,500,000 4,762,000 Direct labor 240,000 560,000 800,000 Supporting direct labor 223,500 521,500 745,000 Batch setups 340,000 272,000 612,000 Product sustaining 350,000 350,000 700,000 Total cost 2,415,500 5,203,500 7,619,000 Product margin 144,500 1,096,500 1,241,000 3 The quantitative comparison is as follows: Xtreme Pathfinder Total (a) (a) ÷ (c ) (b) (b) ÷ (c ) (c ) Traditional Cost System Amount % Amount % Amount Direct materials 1,262,000 26.5% 3,500,000 73.5% 4,762,000 Direct labor 240,000 30.0% 560,000 70.0% 800,000 Manufacturing overhead 630,000 30.0% 1,470,000 70.0% 2,100,000 Total cost assigned to products 2,132,000 5,530,000 7,662,000 Activity-Based Costing System Direct costs: Direct materials 1,262,000 26.5% 3,500,000 73.5% 4,762,000 Direct labor 240,000 30.0% 560,000 70.0% 800,000 Indirect costs: Supporting direct labor 223,500 30.0% 521,500 70.0% 745,000 Batch setups 340,000 55.6% 272,000 44.4% 612,000 Product sustaining 350,000 50.0% 350,000 50.0% 700,000 Total cost assigned to products 2,415,500 5,203,500 7,619,000 Costs not assigned to products: Other 43,000 Total cost 7,662,000 Note: I have tried my best for correct solution still find any difficuty, please ask in comment.

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