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E4-10 . Kragan Clothing Company manufactures its own designed and labeled athletic wear and sells its products through catalog sales and retail outlets. While Kragan

E4-10. Kragan Clothing Company manufactures its own designed and labeled athletic wear and sells its products through catalog sales and retail outlets. While Kragan has for years used activity-based costing in its manufacturing activities, it has always used traditional costing in assigning its selling costs to its product lines. Selling costs have traditionally been assigned to Kragan's product lines at a rate of 70% of direct materials costs. Its direct materials costs for the month of March for Kragan's "high-intensity" line of athletic wear are $400,000. The company has decided to extend activity-based costing to its selling costs. Data relating to the "high-intensity" line of products for the month of March are as follows.

Activity Cost Pools

Cost Drivers

Overhead Rate

Number of Cost Drivers Used per Activity

Sales commissions

Dollar sales

$0.05 per dollar sales

$900,000

Advertising--TV

Minutes

$300 per minute

250

Advertising--Internet

Column inches

$10 per column inch

2,000

Catalogs

Catalogs mailed

$2.50 per catalog

60,000

Cost of catalog sales

Catalog orders

$1 per catalog order

9,000

Credit and collection

Dollar sales

$0.03 per dollar sales

900,000

Instructions

Compute the selling costs to be assigned to the "high-intensity" line of athletic wear for the month of March (1) using the traditional product costing system (direct materials cost is the cost driver), and (2) using activity-based costing.

By what amount does the traditional product costing system undercost or overcost the "high-intensity" product line?

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