I need help with Question 2 on solving the activity based cost. Please show form

Question

I need help with Question 2 on solving the activity based cost. Please show formulas.

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 $ 140.00 $ 99.00 Direct materials per unit $ 72.00 $ 53.00 Direct labor per unit $ 24.00 $ 12.00 Direct labor-hours per unit 2.0 DLHs 1.0 DLHs Estimated annual production and sales 20,000 units 80,000 units

Explanation / Answer

Consequently, the product margins using the traditional approach would be computed as follows:

Direct Materials

Direct Materials

Explanation:
1.

Under the traditional direct labor-hour based costing system, manufacturing overhead is applied to products using the predetermined overhead rate computed as follows:

Predetermined overhead rate = Estimated total manufacturing overhead cost/Estimated total direct labor-hours
=
$1,980,000/120000DLH
= $16.50 per DLH


*20,000 units of Xtreme @ 2 DLH per unit + 80,000 units of the Pathfinder @ 1 DLH per unit = 40,000 DLHs + 80,000 DLHs = 120,000 DLHs

Consequently, the product margins using the traditional approach would be computed as follows:

Xtreme Pathfinder Total Sales 2800000 7920000 10720000

Direct Materials

1440000 4240000 5680000 Direct Labor 480000 960000 1440000 Manufacturing Overhead apploed @ 16.5 per DLH 660000 1320000 1980000 Total Manufacturing Cost 2580000 6520000 9100000 Product Margin 220000 1400000 1620000 Note that all of the manufacturing overhead cost is applied to the products under the company’s traditional costing system.

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