The Ski Corporation makes two types of skis—Better and Great. The data for the t

Question

The Ski Corporation makes two types of skis—Better and Great. The data for the two product lines is:
                                                                                                Better              Great

     Selling price per unit                                                                  210                    150

     Direct materials per unit ($)                                             110                    80
     Direct labor per unit ($)                                                        30                    15
     Direct labor-hours per unit                                                                 2                     1
     Estimated annual production                                            12,500             55,000
The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours.
     Estimated total manufacturing overhead                         $2,000,000
     Estimated total direct labor-hours                                                80,000DLHs

Required:
   1] Using Exhibit 6-12 as a guide, compute the product margins for the Better and Great products under the company’s traditional costing systems. Assume all units are sold.
   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 category contains organization-sustaining and idle capacity costs);
     Activities and activity measures       Est. Overhead costs     Expected activity
                                                                                                  Better   Great   Total
     Supporting direct labor(DLH)            784,000                   25,000 55,000 80,000
     Batch setups (set ups)                        500,000                          400        100        500
     Product sustaining (# of products)    600,000                               1             1            2
     Other                                                 116,000                         N/A         N/A         N/A
     Total manufacturing overhead         2,000,000
Using Exhibit 6-10 as a guide, compute the product margins for the Better and Great products under the activity-based costing system.

Explanation / Answer

Traditional costing systems Estimated annual production 12,500 55,000 Direct labor-hours per unit 2 1 Labor Hour worked 25000 55000 Overhead absorbtion rate =2000000/80000 25 25 Overhead absorbtion Cost 625000 1375000 Activities and activity measures Est. Overhead costs Expected activity Activity Rate Supporting direct labor(DLH)   784000 80000 9.8 Batch setups (set ups) 500000 500 1000 Product sustaining (# of products) 600000 2 300000 Other    116000 Overhead cost allocation Activities and activity measures Better    Great    Activity Rate Better    Great    Supporting direct labor(DLH)   25000 55000 9.8 245000 539000 Batch setups (set ups) 400 100 1000 400000 100000 Product sustaining (# of products) 1 1 300000 300000 300000 Other    NA NA 945000 939000 Product Margin- Traditional Better    Great    Sales 2625000 8250000 Manufacturing Cost Direct materials 1375000 4400000 Direct labor 375000 825000 Overhead absorbtion Cost 625000 1375000 Total Manufacturing Cost 2375000 6600000 Product margin 250000 1650000 Product Margin – ABC Better    Great    Sales 2625000 8250000 Manufacturing Cost Direct materials 1375000 4400000 Direct labor 375000 825000 Overhead absorbtion Cost 945000 939000 Total Manufacturing Cost 2695000 6164000 Product margin -70000 2086000

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