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 $ 90.00 Direct materials per unit $ 64.10 $ 53.00 Direct labor per unit $ 13.50 $ 9.00 Direct labor-hours per unit 1.5 DLHs 1.0 DLHs Estimated annual production and sales 30,000 units 70,000 units

Explanation / Answer

Part 1 - Product Margin Under traditional coating system

Predetermined overhead rate = Total budgeted manufacturing overhead/Total allocation base i.e. direct labour hours

Predetermined overhead rate = $2300000/115000 = $20 per labour hour

$3600000

($120 * 30000)

$6300000

($90 * 70000)

$1923000

($64.1*30000)

$3710000

($53*70000)

$405000

($13.5*30000)

$630000

($9*70000)

$900000

($20 per labour hour * 1.5 hours per unit) * 30000 units

$1400000

($20 per labour hour * 1.0 hours per unit) * 70000 units

$372000

$560000

Part 2 - Profit margin under activity based costing

Step 1 - Allocation of manufacturing overhead as per activity cost drivers

Step 2 - Calculation of Profit Margin

$382500

($8.5 per hour * 45000)

$595000

($8.5 per hour * 70000 hours)

$360000

($1200 per setup*300 setup)

$252000

($1200 per setup*210 setup)

Part 3 - Quantitative analysis

Step 1 - quantitative analysis Under traditional costing system

34.14%

($1923000/$5633000)*100

65.86%

($3710000/5633000)*100

39.13%

($405000/$1035000)*100

60.87%

($630000/$1035000)*100

39.13%

($900000/$2300000)*100

60.87%

($1400000/$2300000)*100

Step 2 - Quantitative analysis under activity based costing

Particulars Xtreme Pathfinder Total Sales

$3600000

($120 * 30000)

$6300000

($90 * 70000)

$9900000 Direct Material Per unit

$1923000

($64.1*30000)

$3710000

($53*70000)

$5633000 Direct labour cost

$405000

($13.5*30000)

$630000

($9*70000)

$1035000 Overhead cost

$900000

($20 per labour hour * 1.5 hours per unit) * 30000 units

$1400000

($20 per labour hour * 1.0 hours per unit) * 70000 units

$2300000 Net Margin

$372000

$560000

$932000

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