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:

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):

Expected Activity

Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system

Prepare a quantitative comparison of the traditional and activity-based cost assignments.

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

Explanation / Answer

Overhead rate based on activity based accounting

Product margin

Predetermined overhead rate under traditional costing = $2470,000/ 98,800 = $25

Hours used by Xtreme = 24,000 *1.20= 28,800 hours

                      Pathfinder = 70,000*1   = 70,000 hours

Supporting direct labor $642,200/ $98,800 $6.50 Batch setups    $915,000/610 $1500 Product sustaining $840,000/2 $420,000 Other $72,800 N/A

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