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 $ 120.00 $ 87.00 Direct materials per unit $ 65.20 $ 51.00 Direct labor per unit $ 11.20 $ 8.00 Direct labor-hours per unit 1.4 DLHs 1.0 DLHs Estimated annual production and sales 30,000 units 65,000 units

Explanation / Answer

1. Statement Showing Product Margin ( Traditional Costing) Xtreme Pathfinder Rate/ Unit Amount Rate/ Unit Amount Production & Sales unit 30000 65000 Sales (a) $120.00 $3,600,000.00 $87.00 $5,655,000.00 Direct Material $65.20 $1,956,000.00 $51.00 $3,315,000.00 Direct Labour $11.20 $336,000.00 $8.00 $520,000.00 Manufacturing Overhead ( W/Note-2) $26.60 $798,000.00 $19.00 $1,235,000.00 Total Maufacturing cost (b) $103.00 $3,090,000.00 $78.00 $5,070,000.00 Product Margin (a-b) $17.00 $510,000.00 $9.00 $585,000.00 W/Note-1: Computation of Overhead Recovery Rate Total Overhead/Estimated labour Hour =2033000/107000=$19/Hour W/Note-2: Computation of ManufacturingOH/Unit Xtreme Pathfinder Direct Labour Hours/Unit ( in Hour) 1.4 1 Overhead recovery rate /Hour $19.00 $19.00 Over Head recovery rate/Unit $26.60 $19.00 2. Statement Showing Product Margin ( Activity) Xtreme Pathfinder Rate/ Unit Amount Rate/ Unit Amount Production & Sales unit 30000 65000 Sales (a) $120.00 $3,600,000.00 $87.00 $5,655,000.00 Direct Material $65.20 $1,956,000.00 $51.00 $3,315,000.00 Direct Labour $11.20 $336,000.00 $8.00 $520,000.00 Manufacturing Overhead ( W/Note-3) Batch Setup Cost $492,000.00 $384,000.00 Supportive Direct Labour Cost $247,800.00 $383,500.00 Product Suistaining Cost $230,000.00 $230,000.00 Total Maufacturing cost (b) $3,261,800.00 $4,832,500.00 Product Margin (a-b) $338,200.00 $822,500.00 W/Note-3: Computation of Activity wise Manufacturing Overhead Xtreme Pathfinder Total Batch Setup Cost $876,000.00 No. Batches Setup 410 320 730 Allocation of Batch Set up cost $492,000.00 $384,000.00 $876,000.00 (876000*410/730 (876000*320/730 Supporting DirectLabour cost $631,300.00 Direct Labour Hours 42000 65000 107000 Allocation of Supportive Direct Labour Cost $247,800.00 $383,500.00 $631,300.00 ($631300*42/107) ($631300*65/107) Product Suistaining Cost $460,000.00 Number of product 1 1 2 Allocation of Product Suistaining Cost $230,000.00 $230,000.00 $460,000.00 ( $460000/2*1) ( $460000/2*1) Statement Showing Comparison of Traditional and Activity based cost Xtreme Pathfinder Manufacturing Overhead under Traditional Costing $798,000.00 $1,235,000.00 Manufacturing Overhead under Activity Based Costing $969,800.00 $997,500.00 Difference $171,800.00 -$237,500.00

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