Smoky Mountain Corporation makes two types of hiking boots—the Xtreme and the Pathfinder. Data concerning these two product lines appear below: Xtreme Pathfinder Selling price per unit $ 128.00 $ 90.00 Direct materials per unit $ 63.10 $ 50.00 Direct labor per unit $ 12.00 $ 8.00 Direct labor-hours per unit 1.5 DLHs 1.0 DLHs Estimated annual production and sales 20,000 units 70,000 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 $ 2,100,000 Estimated total direct labor-hours 100,000 DLHs 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): EstimatedOverhead Cost Expected Activity Activities and Activity Measures Xtreme Pathfinder Total Supporting direct labor (direct labor-hours) $ 745,000 30,000 70,000 100,000 Batch setups (setups) 612,000 200 160 360 Product sustaining (number of products) 700,000 1 1 2 Other 43,000 NA NA NA Total manufacturing overhead cost $ 2,100,000 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.

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter6: Activity-based, Variable, And Absorption Costing

Section: Chapter Questions

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Smoky Mountain Corporation makes two types of hiking boots—the Xtreme and the Pathfinder. Data concerning these two product lines appear below:

	Xtreme	Pathfinder
Selling price per unit	$	128.00		$	90.00
Direct materials per unit	$	63.10		$	50.00
Direct labor per unit	$	12.00		$	8.00
Direct labor-hours per unit		1.5	DLHs		1.0	DLHs
Estimated annual production and sales		20,000	units		70,000	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	$	2,100,000
Estimated total direct labor-hours		100,000	DLHs

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):

	Estimated Overhead Cost	Expected Activity
Activities and Activity Measures	Xtreme	Pathfinder	Total
Supporting direct labor (direct labor-hours)	$	745,000		30,000	70,000	100,000
Batch setups (setups)		612,000		200	160	360
Product sustaining (number of products)		700,000		1	1	2
Other		43,000		NA	NA	NA
Total manufacturing overhead cost	$	2,100,000

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.

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