Kragan Clothing Company manufactures its own designed and labeled athletic wear
ID: 2422170 • Letter: K
Question
Kragan Clothing Company manufactures its own designed and labeled athletic wear and sells its products through catalog sales and retail outlets While Kragan has for years used activity-based costing in its manufacturing activities, it has always used traditional costing in assigning its selling costs to its product lines. Selling costs have traditionally been assigned to Kragan's product lines at a rate of 70% of direct materials costs. Its direct materials costs for the month of March for Kragan's "high-intensity" line of athletic wear are $395,000. The company has decided to extend activity-based costing to its selling costs. Data relating to the "high-intensity" line of products for the month of March are as follows. Compute the selling costs to be assigned to the "high-intensity" product line of athletic wear for the month of March (1) using the traditional product costing system (direct materials cost is the cost driver), and (2) using activity-based costing. By what amount does the traditional product costing system undercost or overcost the "high-intensity" product line?Explanation / Answer
a) According to traditional costing system selling cost is 70% of 395000 276500 Activity Based Costing selling cost is Activity cost pool overhead rate No. of cost driver Amount sales commissions $0.05 $940,000 47000 Advertising-TV 300 230 69000 Advertising-Internet $10 2000 20000 Catalogas 2.5 62400 156000 Cost of catalog sale 1 8750 8750 Credit & Collection 0.03 940000 28200 Total 328950 b) According to traditional costing the cost is $276500 against $328950 so it is undercost by $328950-276500 52450 $ Ans
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