value: 6.66 points Problem 7-17 Comparing Traditional and Activity-Based Product
ID: 2466514 • Letter: V
Question
value: 6.66 points Problem 7-17 Comparing Traditional and Activity-Based Product Margins [LO7-1, LO7-3, LO7-4, LO7-5] Smoky Mountain Corporation makes two types of hiking boots-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 Xtreme $121.00 S 65.30 S 13.50 Pathfinder S 88.00 S 52.00 S 9.00 1.5 DLHs 31,000 units 1.0 DLHs 35,000 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 $2,230,000 111,500 DLHs Required 1. Compute the product margins for the Xtreme and the Pathfinder products under the company's traditional costing system. (Do not round your intermediate calculations.) Xtreme Pathfinder Total Product marginExplanation / Answer
Answer:1 Under the traditional direct labor-hour based costing system, manufacturing overhead is applied to products using the predetermined overhead rate computed as follows:
Predetermined overhead rate=Estimated total manufacturing Overhead cost/Estimated total direct labor hours
=2230000/111500* DLH
=$20.00 per DLH
*31,000 units of Xtreme @ 1.5 DLH per unit + 65,000 units of the Pathfinder @ 1 DLH per unit = 46,500 DLHs + 65,000 DLHs = 111,500 DLHs
Consequently, the product margins using the traditional approach would be computed as follows:
Note that all of the manufacturing overhead cost is applied to the products under the company’s traditional costing system.
Answer:2
The first step is to determine the activity rates:
*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:
Answer:3 The quantitative comparison is as follows:
Xtreme Pathfinder Total Sales $ 3,751,000 $ 5,590,000 $ 9,341,000 Direct materials 2,024,300 3,380,000 5,404,300 Direct labor 418,500 585,000 1,003,500 Manufacturing overheadapplied @ $20.00 per direct labor-hour 930,000 1,300,000 2,230,000 Total manufacturing cost 3,372,800 5,265,000 8,637,800 Product margin $ 378,200 $ 325,000 $ 703,200
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