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: Pathfinder $ 87.00 $ 52.00 $ 10.00 Xtreme Selling price per unit Direct materials per unit Direct labor per unit Direct labor-hours per unit Estimated annual production and sales $ 120.00 $ 63.30 $ 17.00 1.7 DLHs 1.0 DLHs 22,000 units 76,000 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 $ 1,927,800 113,400 DLHs 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) Estimated Expected Activity Activities and Activity Measures Supporting direct labor (direct labor-hours) Batch setups (setups) Product sustaining (number of products) Other Overhead Cost Xtreme Pathfinder Total $ 703,080 37,400 76,000 180 480,000 700,000 44,720 $ 1,927,800 113,400 400 2 NA 220 NA NA Total manufacturing overhead cost 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

Explanation / Answer

1) overhead rate estimated MOH/estimated DLH's 1,927,800/113,400 17 product margin Xtreme pathfinder total Selling price per unit 120 87 less:Expense Direct materials per unit 63.3 52 Direct labor per unit 17 10 overhead pu (oh rate*DLH's pu) 28.9 17 total unit cost 109.2 79 product margin 10.8 8 18.8 Xtreme pathfinder total product margin 237600 608000 845600 answer 2) overhead rate oh rate amount driver Activity Supporting direct labor 703,080 113,400 6.2 batch setups 480,000 400 1200 product sustaining 700,000 2 350000 allocation of overhead and per unit cost Xtremet Pathfinder Rate driver OH Rate Driver OH Activity Supporting direct labor 6.2 37,400 231880 6.2 76,000 471200 batch setups 1200 220 264000 1200 180 216000 product sustaining 350000 1 350000 350000 1 350000 total overhead 845880 1037200 total production 22,000 76,000 overhead per unit 38.45 13.65 product margin Xtreme pathfinder total Selling price per unit 120 87 less:Expense Direct materials per unit 63.3 52 Direct labor per unit 17 10 overhead pu (oh rate*DLH's pu) 38.45 13.65 total unit cost 118.75 75.65 product margin 1.25 11.35 12.60 Xtreme pathfinder total product margin 27520 862800 890320 answer 3) Xtreme Pathfinder total % of % of Amount total amount Amount total amount Amount Traditional Cost system Direct materials 1392600 26.1% 3952000 73.9% 5344600 direct labor 374000 33.0% 760000 67.0% 1134000 manufacturing overhead 635800 33.0% 1292000 67.0% 1927800 total cost assigned to produts 2402400 6004000 8406400 Xtreme Pathfinder total % of % of Amount total amount Amount total amount Amount Activity based Direct materials 1392600 26.1% 3952000 73.9% 5344600 direct labor 374000 33.0% 760000 67.0% 1134000 indirect costs Supporting direct labor 231880 33.0% 471200 67.0% 703080 batch setups 264000 55.0% 216000 45.0% 480000 product sustaining 350000 50.0% 350000 50.0% 700000 total cost assigned to products 2612480 5749200 8361680 costs not assigned to products other 70,700 total cost. 8432380

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