Smoky Mountain Corporation makes two types of hiking boots -Xtreme and the Pathf

Question

Smoky Mountain Corporation makes two types of hiking boots -Xtreme and the Pathfinder. Data conceming 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 S 120.00 S 63.30 S 17.00 S 87.00 $ 52.00 S 10.00 1.0 DLHs 6,000 units 1.7 DLHs 22,000 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 $1,927,800 Estimated total manufacturing overhead Estimated total direct labor-hours 113.400 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 Total Product margin 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) Activities and Activity Measures Supporting direct labor (direct labor-hours) Batch setups (setups) Product sustaining (number of products) Other Total manufacturing overhead cost Overhead Cost Total S 703,080 480,000 700,000 44,720 1927,800 37,400 220 76,000 180 113,400 400 NA NA NA Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system. (Negative product margins should be indicated with a minus sign. Round your intermediate calculations to 2 decimal Total Product margin

Explanation / Answer

1) Under traditional direct labor hours based costing system mabufacturing overhead is applied to pruducts using predetermined overhead rate predetermined overhead rate = estimated total manufacturing overhead cost/estimated total direct labor hours predetermined overhead rate = 1927800/113400= 17 per DLHS estimated direct labour hour = 22000 unit of xtreme @1.7 DLHS + 76000 unit of pathfinder @1DLHS estimated direct labour hour = 37400+76000= 113400 Compute the product margins using the traditional approach whould be computed Particulars Xtreme Pathfinder total Sales (a) 2640000 6612000 9252000 direct materials 1392600 3952000 5344600 direct labour 374000 760000 1134000 manufaturing overhead @17 predirect labour hrs 635800 1292000 1927800 total manufaturing cost (b) 2402400 6004000 8406400 product margin (a)-(b) 237600 608000 845600 2) step is to determine the activity rates activity cost pools total cost (a) total activity(b) activity rate(a)/(b) supporting direct labour 703080 113400 DLH    6.2 PER DLH batch setups 480000 400 SETUPS 1200 PER SETUP product sustaning 700000 2 PRODUCTS 350000 PER PRODUCT UNDER Activity based costing system the product margin would be computed as follows particulars Xtreme Pathfinder total Sales (a) 2640000 6612000 9252000 Direct material 1392600 3952000 5344600 direct labour 374000 760000 1134000 supporting direct labour 231880 471200 703080 batch setups 264000 216000 480000 pruduct sustaining 350000 350000 700000 total cost (b) 2612480 5749200 8361680 product margin (a) - (b) 27520 862800 890320 3) the quantitative comparision is as follows particulars Xtreme pathfinder total traditional cost system (a) (a)/c (b) (b)/© c Direct material 1392600 26% 3952000 74% 5344600 direct labour 374000 33% 760000 67% 1134000 manufacturing overhead 635800 33% 1292000 67% 1927800 total cost assigned to products 2402400 6004000 8406400 activity based costing system Direct cost Direct material 1392600 26% 3952000 74% 5344600 direct labour 374000 33% 760000 67% 1134000 indirect cost supporting direct labourt 231880 33% 471200 67% 703080 batch setups 264000 55% 216000 45% 480000 product sustaining 350000 50% 350000 50% 700000 total cost assigned to products 845880 1037200 1883080 cost not assigned to products other 44720 total cost 1927800

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