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 $ 120.00 $ 87.00 Direct materials per unit $ 63.60
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 | $ | 120.00 | $ | 87.00 | ||
| Direct materials per unit | $ | 63.60 | $ | 55.00 | ||
| Direct labor per unit | $ | 12.00 | $ | 10.00 | ||
| Direct labor-hours per unit | 1.2 | DLHs | 1.0 | DLHs | ||
| Estimated annual production and sales | 25,000 | units | 72,000 | 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 | $ | 2,040,000 | |
| Estimated total direct labor-hours | 102,000 | 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) | $ | 622,200 | 30,000 | 72,000 | 102,000 | |
| Batch setups (setups) | 644,000 | 250 | 210 | 460 | ||
| Product sustaining (number of products) | 700,000 | 1 | 1 | 2 | ||
| Other | 73,800 | NA | NA | NA | ||
| Total |
$ | 2,040,000 | ||||
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
Complete this question by entering your answers in the tabs below.
- Required 1
- Required 2
- Required 3
Compute the product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system. (Round your intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)
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Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system. (Round your intermediate calculations to 2 decimal places.)
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Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answers to 1 decimal place.)
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- Required 2
Activity-based costing is a contemporary method of overhead cost allocation that requires the classification of overhead costs into various cost pools. Costs can be classified as unit-level, batch-level, product-level or organization-sustaining level. Once overhead costs have been classified into relevant costs pools, a cost driver will need to be selected for each pool. A cost driver is an activity that drives up overhead costs within the cost pool. Examples of cost drivers include machine hours and number of batches produced. An activity rate will subsequently be calculated based on the selected cost driver. The formula for calculating activity rate is budgeted overhead costs for each cost pool divided by budgeted quantity of cost driver. Overhead costs from each cost pool will then be applied to products based on the activity rate. Total overhead costs for each product will be calculated by adding overhead costs applied from each cost pool. The ABC system will typically be a more accurate method for overhead cost allocation as compared to the traditional method.
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