PROBLEM 7-17 Comparing Traditional and Activity-Based Product Margins L07-103. L

Question

PROBLEM 7-17 Comparing Traditional and Activity-Based Product Margins L07-103. L07-3,L07-4 @,L07-5g Smoky Mountain Corporation makes two types of hiking boots-the 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 $140.00 $72.00 $24.00 Pathfinder $99.00 $53.00 $12.00 2.0 DLHs 1.0 DLHs 20,000 units 80,000 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 ycar appcar bclow: Estimated total manufacturing overhead Estimated total direct labor-hours $1,980,000 120,000 DLHs Required: 1. Using Exhibit 7-13 as a guide, 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): Expected Activity Estimated Overhead Cost Xtreme Pathfinder Activities and Activity Measures Supporting direct labor (direct labor-hours) Batch setups (setups) Product sustaining (number of products) Other Total manufacturing overhead cost Total 120,000 300 $ 783,600 495,000 602,400 99,000 $1980,000 40,000 200 80,000 100 NA NA NA Using Exhibit 7-11 as a guide, compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system. 3. Using Exhibit 7-14 as a guide, prepare a quantitative comparison of the traditional and activity-based cost assignments. Explain why the traditional and activity-based cost assignments differ

Explanation / Answer

Answer 1. Predetermined Overhead Rate = $1,980,000 / 120,000 Lab. Hrs Predetermined Overhead Rate = $16.50 per DLH Statement Showing Product Margin Under Traditional Costing System Xtreme Pathfinder Total Sales in Unit                20,000             80,000 SP per Unit                      140                     99 Sales in $          2,800,000       7,920,000        10,720,000 Less: Cost of Goods Sold Direct material          1,440,000       4,240,000          5,680,000 Direct Labour              480,000           960,000          1,440,000 Manufacturing Overhead              660,000       1,320,000          1,980,000 Cost of goods Sold          2,580,000       6,520,000          9,100,000 Gross / Product Margin              220,000       1,400,000          1,620,000 Answer 2. Activity Cost Pool Estimated Overhead Expected use of Cost Drivers Activity-Based Overhead rate Supporting Direct Labor              783,600           120,000                           7 per DLH Batch Setups              495,000                   300                  1,650 per setup Product Sustaining              602,400                        2              301,200 per product others                99,000 NA NA Total Overhead          1,980,000 Alocation of Overhead Cost Under ABC Particulars Hiking Boots Total Xtreme Pathfinder Supporting Direct Labor              261,200           522,400              783,600 Batch Setups              330,000           165,000              495,000 Product Sustaining              301,200           301,200              602,400 Total              892,400           988,600          1,881,000 Statement Showing Product Margin Under ABC Xtreme Pathfinder Total Sales in Unit 20000 80000 SP per Unit 140 99 Sales in $          2,800,000       7,920,000        10,720,000 Less: Cost of Goods Sold Direct material          1,440,000       4,240,000          5,680,000 Direct Labour              480,000           960,000          1,440,000 Manufacturing Overhead              892,400           988,600          1,881,000 Cost of goods Sold          2,812,400       6,188,600          9,001,000 Product Margin              (12,400)       1,731,400          1,719,000 Non Traceable Other Manufacturing Exp.                99,000 Net Operating Profit / (Loss)          1,620,000 Answer 3. Xtreme Pathfinder Total Amt % of Total Amt. % of Total Amt. Amount Traditional Cost System Direct material          1,440,000 25.35%          4,240,000 74.65%           5,680,000 Direct Labour              480,000 33.33%              960,000 66.67%           1,440,000 Manufacturing Overhead              660,000 33.33%          1,320,000 66.67%           1,980,000 Total Cost Assigned to product          2,580,000          6,520,000           9,100,000 Xtreme Pathfinder Total Amt % of Total Amt. % of Total Amt. Amount Activity Based Costing Direct Costs Direct material          1,440,000 25.35%          4,240,000 74.65%           5,680,000 Direct Labour              480,000 33.33%              960,000 66.67%           1,440,000 Indirect Costs Supporting Direct Labor              261,200 33.33% 522400 66.67%               783,600 Batch Setups 330000 66.67% 165000 33.33%               495,000 Product Sustaining 301200 50.00% 301200 50.00%               602,400 Total Cost assigned to products          2,812,400          6,188,600           9,001,000 Costs not assigned to products Non Traceable Other Manufacturing Exp.                 99,000 Total Cost           9,100,000

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