Smoky Mountain Corporation makes two types of hiking boots—the Xtreme and the Pa
ID: 2412353 • Letter: S
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 $ 120.00 $ 92.00 Direct materials per unit $ 63.50 $ 54.00 Direct labor per unit $ 13.50 $ 9.00 Direct labor-hours per unit 1.5 DLHs 1.0 DLHs Estimated annual production and sales 24,000 units 71,000 unitsExplanation / Answer
1
Compute the product Margins for the Xtreme and the pathfinder products under the company's traditional costing system
Predetermined overhead rate
Estimated total manufacturing overhead cost/Estimated total direct labors
2033000/107000
$19 per DLH
Xtreme
Pathfinder
Total
sales
2880000
6532000
9412000
Direct Materials
1524000
3834000
5358000
Direct labor
324000
639000
963000
Manufacturing overhead applied
684000
1349000
2033000
(24000*1.5*$19)
(71000*1*$19)
0
Total Manufacturing cost
2532000
5822000
8354000
Product Margin
348000
710000
1058000
2
Activity rates
Activity cost pool
Total cost (a)
Total activity (b)
(a/b)
Supporting direct labor
663400
107000
6.2
Per DLH
Batch setups
572000
440
1300
Per setup
Product sustaining
750000
2
375000
Per product
Product margins would be computed by using activity rates
Xtreme
Pathfinder
Total
sales
2880000
6532000
9412000
Direct Materials
1524000
3834000
5358000
Direct labor
324000
639000
963000
Supporting direct labor
223200
440200
663400
Batch setups
312000
260000
572000
Product sustaining
375000
375000
750000
Total Manufacturing cost
2758200
5548200
8306400
Product Margin
121800
983800
1105600
Quantitave comparison is as follows
Traditional approach
Xtreme
Pathfinder
Total
sales
2880000
30.6%
6532000
69.4%
9412000
Direct Materials
1524000
28.4%
3834000
71.6%
5358000
Direct labor
324000
33.6%
639000
66.4%
963000.3
Manufacturing overhead applied
684000
33.6%
1349000
66.4%
2033000
(24000*1.5*$19)
(71000*1*$19)
0
Total Manufacturing cost
2532000
30.3%
5822000
69.7%
8354000
Product Margin
348000
32.9%
710000
67.1%
1058000
ABC
Xtreme
Pathfinder
Total
sales
2880000
30.6%
6532000
69.4%
9412000
Direct Materials
1524000
28.4%
3834000
71.6%
5358000
Direct labor
324000
33.6%
639000
66.4%
963000.3
Supporting direct labor
223200
33.6%
440200
66.4%
663400.3
Batch setups
312000
54.5%
260000
45.5%
572000.5
Product sustaining
375000
50.0%
375000
50.0%
750000.5
Total Manufacturing cost
2758200
33.2%
5548200
66.8%
8306400
Product Margin
121800
11.0%
983800
89.0%
1105600
1
Compute the product Margins for the Xtreme and the pathfinder products under the company's traditional costing system
Predetermined overhead rate
Estimated total manufacturing overhead cost/Estimated total direct labors
2033000/107000
$19 per DLH
Xtreme
Pathfinder
Total
sales
2880000
6532000
9412000
Direct Materials
1524000
3834000
5358000
Direct labor
324000
639000
963000
Manufacturing overhead applied
684000
1349000
2033000
(24000*1.5*$19)
(71000*1*$19)
0
Total Manufacturing cost
2532000
5822000
8354000
Product Margin
348000
710000
1058000
2
Activity rates
Activity cost pool
Total cost (a)
Total activity (b)
(a/b)
Supporting direct labor
663400
107000
6.2
Per DLH
Batch setups
572000
440
1300
Per setup
Product sustaining
750000
2
375000
Per product
Product margins would be computed by using activity rates
Xtreme
Pathfinder
Total
sales
2880000
6532000
9412000
Direct Materials
1524000
3834000
5358000
Direct labor
324000
639000
963000
Supporting direct labor
223200
440200
663400
Batch setups
312000
260000
572000
Product sustaining
375000
375000
750000
Total Manufacturing cost
2758200
5548200
8306400
Product Margin
121800
983800
1105600
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