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:

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:

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):

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.

Xtreme Pathfinder Selling price per unit $ 120.00 $ 87.00 Direct materials per unit $ 65.20 $ 51.00 Direct labor per unit $ 11.20 $ 8.00 Direct labor-hours per unit 1.4 DLHs 1.0 DLHs Estimated annual production and sales 30,000 units 65,000 units

Explanation / Answer

Smoky Mountain Corporation Tradiitonal Costing System Xtereme Pathfinder Estimated FOH 2033000 Selling Price 120.00 87.00 Estimated DLH 107000 Expected Activity Less: Direct Material PU 65.20 51.00 Overhead Recovery Rate PU 19.00 Activity Activity Measure Estimated OH Xtereme Pathfinder Total Per Activty Measure Less: Direct Labor PU 11.20 8.00 Supporting DL DLH 631300 42000 65000 107000 5.90 Less: Allocated Manufacturing OH 26.60 19.00 Batch Setups Setups 876000 410 320 730 1,200.00 (1.4*19)/(1*19) Product Susbs No of Product 460000 1 1 2 2,30,000.00 Product Margin 17.00 9.00 Others NA 65700 NA NA 0 Total M. OH 2033000 Smoky Mountain Corporation Smoky Mountain Corporation Activity Based Costing System: Xtereme Pathfinder Xtereme Pathfinder Selling Price 120.00 87.00 Supporting DL 2,47,800 3,83,500 Less: Direct Material PU 65.20 51.00 Batch Setups 4,92,000 3,84,000 Less: Direct Labor PU 11.20 8.00 Product Susbs 2,30,000 2,30,000 Less: Allocated Manufacturing OH 32.33 15.35 Others - - (Working Note) Total M. OH(A) 9,69,800 9,97,500 Product Margin 11.27 12.65 Units(B) 30,000 65,000 Per Unit(A/B) 32.327 15.35 Quantitative Comparison of Both Methods: Tradiitonal Costing System Xtereme % Pathfinder % Total Direct Material 65.20 63.30% 51.00 65.38% 116.20 Direct Labor 11.20 10.87% 8.00 10.26% 19.20 Manufacturing OH 26.60 25.83% 19.00 24.36% 45.60 Total Cost Assigned to products 103.00 100.00% 78.00 100.00% 181.00 Activity Based Costing System: Direct Costs: Direct Material 65.20 59.97% 51.00 68.60% 116.20 Direct Labor 11.20 10.30% 8.00 10.76% 19.20 Indirect Costs: Supporting DL 8.26 7.60% 5.90 7.94% 14.16 Batch Setups 16.40 15.08% 5.91 7.95% 22.31 Product Susbs 7.67 7.05% 3.54 4.76% 11.21 Total Cost Assigned to products 108.73 100.00% 74.35 100.00% 183.07 Units 30,000 65,000 Total Cost 32,61,800 48,32,500 80,94,300 Cost not Assigned to products: Others 65700 Total Costs 81,60,000

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