Smoky Mountain Corporation makes two types of hiking boots-Xtreme and the Pathfi
ID: 2512035 • Letter: S
Question
Smoky Mountain Corporation makes two types of hiking boots-Xtreme and the Pathfinder. Data concerning 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 Xtreme 120.00 63.50 S 13.50 92.00 S 54.00 $ 9.00 .5 DLHs 24,000 units 1.0 DLHs 71,000 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 $2,033,000 107,000 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 Pathfinder Product marginExplanation / Answer
Solution:
Part 1 – Product Margin under traditional costing
Product Margin is the difference between selling price and product cost.
Product cost is the cost of making the product.
Under traditional costing, product cost is the sum of direct materials, direct labor, variable manufacturing overhead and fixed manufacturing overhead.
In this costing system, overheads are allocated on the basis of predetermined overhead rate by taking actual activity level achieved by the company.
So, first of all we need to calculate the Predetermined Overhead Rate.
Allocation base is direct labor hours.
Predetermined overhead rate = Total estimated manufacturing / Allocation base i.e. Total Estimated Direct labor hours
= $2,033,000 / 107,000 DLHs
= $19 per DLH
Assigned Manufacturing Overhead Cost to Product Xtreme = Required Direct labor hours per unit 1.5 DLHs x Overhead Rate $19 = $28.50 per unit
Assigned Manufacturing Overhead Cost to Product Pathfinder = Direct labor Hours Needed 1 DLH per unit x $19 = $19 per unit
Calculation of Product Margin under traditional costing system
Product Margin
Xtreme
Pathfinder
Unit Selling Price
$120.00
$92.00
Product Cost:
Direct materials per unit
$63.50
$54.00
Direct labor per unit
$13.50
$9.00
Assigned Manufacturing Overhead (Refer working above)
$28.50
$19.00
Product Cost per unit
$105.50
$82.00
Product Margin (Selling price - Product Cost)
$14.50
$10.00
Part 2 – Product Margin Under ABC System
Activity Based Costing System
- ABC is a costing method which identifies the activities in the organization and assigns the cost of each activity with resources to all the products or services according to the actual consumption of activity by the product or service.
- This system determines all the activities related to product or production process.
- This system calculates the cost of those activities which are related to product or production process and thereafter determine the cost of the product.
- In ABC costing the overhead costs are distributed to the product on the basis of benefit received from indirect activity.
- It helps to distribution of overheads on the basis of activities.
The Activity based overhead rate = Estimated Overheads related to the activity / Total Cost Driver per activity)
First we need to calculate the overhead rate and then assigned the overhead cost by using actual activity usage by each product and overhead rate as follows:
Xtreme
Pathfinder
Activity Cost Pool
Expected Manufacturing Overhead Costs (A)
Expected Total Activity Cost Driver (B)
Activity Rate (C = A/B)
Activity Driver USAGE (H)
Overhead Assigned (C*H)
Activity Driver USAGE (E)
Overhead Assigned (C*E)
Supporting direct labors
$663,400
107,000
Direct labor hours
$6.20
per hour
36000
$223,200
71000
$440,200
Batch setups
$572,000
440
Setups
$1,300.00
per setup
240
$312,000
200
$260,000
Product sustaining
$750,000
2
Products
$375,000.00
per product
1
$375,000
1
$375,000
Other
$47,600
Total Assigned Manufacturing Overhead (A)
$2,033,000
$910,200
$1,075,200
/ Budgeted Production Volume (units) (B)
24000
71000
Applied Manufacturing Overhead Per Unit (A/B)
$37.93
$15.14
Product Margin
Product Margin
Xtreme
Pathfinder
Unit Selling Price
$120.00
$92.00
Product Cost:
Direct materials per unit
$63.50
$54.00
Direct labor per unit
$13.50
$9.00
Assigned Manufacturing Overhead (Refer working above)
$37.93
$15.14
Product Cost per unit
$114.93
$78.14
Product Margin (Selling price - Product Cost)
$5.08
$13.86
Part 3 – Quantitative Comparison
Quantitative Comparision of Traditional and Activity Based Cost assignments
Xtreme
Pathfinder
Total Amount
Amount
% of Total Amount
Amount
% of Total Amount
Traditional Cost System
Direct materials
$1,524,000
28.44%
$3,834,000
71.56%
$5,358,000
Direct Labor
$324,000
33.64%
$639,000
66.36%
$963,000
Manufacturing Overhead
$684,000
33.64%
$1,349,000
66.36%
$2,033,000
Total Cost assigned to products
$2,532,000
30.31%
$5,822,000
69.69%
$8,354,000
Activity Based Costing System
Direct Costs:
Direct materials
$1,524,000
28.44%
$3,834,000
71.56%
$5,358,000
Direct Labor
$324,000
33.64%
$639,000
66.36%
$963,000
Indirect Costs:
Supporting direct labor
$223,200
33.64%
$440,200
66.36%
$663,400
Batch Setup
$312,000
54.55%
$260,000
45.45%
$572,000
Product Sustaining
$375,000
50.00%
$375,000
50.00%
$750,000
Total Cost assigned to products
$2,758,200
33.21%
$5,548,200
66.79%
$8,306,400
Costs not assigned to products
Other
$47,600
Total Cost
$8,354,000
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Product Margin
Xtreme
Pathfinder
Unit Selling Price
$120.00
$92.00
Product Cost:
Direct materials per unit
$63.50
$54.00
Direct labor per unit
$13.50
$9.00
Assigned Manufacturing Overhead (Refer working above)
$28.50
$19.00
Product Cost per unit
$105.50
$82.00
Product Margin (Selling price - Product Cost)
$14.50
$10.00
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