MHE Reader × @ pearson Signln | Secure Trittps//newconnectmheducation. Chapter 7
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MHE Reader × @ pearson Signln | Secure Trittps//newconnectmheducation. Chapter 7 Help Seve & Exit Submlt Check my work 2 Smoky Mountain Corporation makes two types of hiking boots- the Xtreme and the Pathfinder Data concerning these two product lines appeer below 10 Selling price per unit Direct materials per unit Direct labor per unit Direct labor-hours per unit Estinated annual production and sales $ 148.90 $ 72.8e S 24.00 5 53.00 12.08 1.e DLHS 20,900 units 88,800 units The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours Data conceming manufacturing overhead and direct labor-hours for the upcoming year appear below s 1,088, eee Estinated total nanufacturing overhead Estimated total direct 1abor-hours 12e,088 DLHS costing system. 1. Compute the product margins for the Xtreme and the Pathfinder products under the company's tradition 2 The company is considering replacing its traditional costing system with an activity-based costing system that wo manufacturing overheed to the folowing four activity cost pools the Other cost pool Includes organizetion-sustaining costs and idle capacity costsExplanation / Answer
Solution:
Part 1 – Product Margin Under Traditional Costing System
Under traditional costing system, a predetermined overhead rate is used to allocate the manufacturing overhead costs to the product. Predetermined Overhead Rate is the estimated overhead rate calculated by estimating the total overhead for the period and suitable allocation base. Allocation base may be direct labor hour, direct labor cost or machine hours.
Total Estimated Manufacturing Overhead = $1,980,000
Total Estimated Direct Labor Hours = 120,000 DLHs
Predetermined Overhead Rate = Total Estimated Manufacturing OH $1,980,000 / Total Estimated Direct Labor Hours 120,000 DLHs
= $16.50 per DLHs
Applied Manufacturing Overheads to:
Product Xtreme = Direct labor hours required per unit x OH Rate = 2 DLHs x $16.50 = $33
Product Pathfinder = 1 DLH x $16.50 = $16.50
Product Margin is the difference between selling price and product cost.
Product cost as per traditional costing system includes direct material cost , direct labor cost and manufacturing overhead.
Xtreme
Pathfinder
Unit Selling Price
$140
$99
Manufacturing Cost:
Direct material cost per unit
$72
$53
Direct labor cost per unit
$24
$12
Applied Manufacturing Overhead (above working)
$33
$16.50
Unit Manufacturing Costs
$129
$81.50
Unit Product Margin
$11.00
$17.50
Part 2 – Product Margin under activity based costing
- ABC is a costing method which identifies the activities in the organization and assigns the cost of each activity with resources to all the products or services according to the actual consumption of activity by the product or service.
- This system determines all the activities related to product or production process.
- This system calculates the cost of those activities which are related to product or production process and thereafter determine the cost of the product.
- In ABC costing the overhead costs are distributed to the product on the basis of benefit received from indirect activity.
- It helps to distribution of overheads on the basis of activities.
The Activity based overhead rate = Estimated Overheads related to the activity / Total Cost Driver per activity or Expected Total Activity)
First of all we will calculate Activity Rate per activity and then applied overhead based on the actual usage of activity by each product as follows
Xtreme
Pathfinder
Activity Cost Pool
Expected Manufacturing Overhead Costs (A)
Expected Total Activity Cost Driver (B)
Activity Rate (C = A/B)
Activity Driver USAGE (H)
Overhead Assigned (C*H)
Activity Driver USAGE (E)
Overhead Assigned (C*E)
Supporting direct labors
$783,600
120,000
Direct labor hours
$6.53
per hour
40000
$261,200
80000
$522,400
Batch setups
$495,000
300
Setups
$1,650.00
per setup
200
$330,000
100
$165,000
Product sustaining
$602,400
2
Products
$301,200.00
per product
1
$301,200
1
$301,200
Other
$99,000
Total
$1,980,000
$892,400
$988,600
/ Budgeted Production Volume (units) (B)
20000
80000
Applied Manufacturing Overhead Per Unit (A/B)
$44.62
$12.36
Product Margin
Xtreme
Pathfinder
Unit Selling Price
$140.00
$99.00
Manufacturing Cost:
Direct material cost per unit
$72.00
$53.00
Direct labor cost per unit
$24.00
$12.00
Applied Manufacturing Overhead (above working)
$44.62
$12.36
Unit Manufacturing Costs
$140.62
$77.36
Unit Product Margin
-$0.62
$21.64
Part 3 --- Quantitative comparision
Xtreme
Pathfinder
Product Margin
As per traditional costing
$11.00
$17.50
As per ABC Costing
-$0.62
$21.64
Applied Manufacturing Overhead
As per traditional costing
$33.00
$16.50
As per ABC Costing
$44.62
$12.36
Traditional Costing uses a overhead rate for whole company on the estimation basis and applied the overhead to product based on that allocation base which are most suitable to taken as allocation base.
Activity Based costing determines the activity involved in each product and associated overhead than the activity rate is calculated and the overheads are assigned on the basis of actual activity usage by the product.
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Xtreme
Pathfinder
Unit Selling Price
$140
$99
Manufacturing Cost:
Direct material cost per unit
$72
$53
Direct labor cost per unit
$24
$12
Applied Manufacturing Overhead (above working)
$33
$16.50
Unit Manufacturing Costs
$129
$81.50
Unit Product Margin
$11.00
$17.50
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