Question 7-4 Problem 7-17 (45 minutes) 1. Under the traditional direct labor-hour based costing system, manufacturing overhead is applied to products using the predetermined overhead rate computed as follows: Consequently, the product margins using the traditional approach would be computed as follows: Xtreme Pathfinder Total Sales Direct materials Direct labor Manufacturing overhead applied @ $16.50 per direct labor-hour Total manufacturing cost Product margin $ 220,000 $1,400,000 $ 1,620,000 Note that all of the manufacturing overhead cost is applied to the products under the companys traditional costing system. 2. The first step is to determine the activity rates: Activity Cost Pools Supporting direct labor Batch setups Product sustaining *The Other activity cost pool is not shown above because it includes organization-sustaining and idle capacity costs that should not be assigned to products. Under the activity-based costing system, the product margins would be computed as follows: Xtreme Pathfinder Total Sales Direct materials Direct labor Supporting direct labor Batch setups Product sustaining Total cost Product margin $ (12,400) $1,731,400 $ 1,719,000 Problem 7-17 (continued) 3. The quantitative comparison is as follows: Xtreme Pathfinder Total Traditional Cost System (a) Amount (a) (c) % (b) Amount (b) (c) % (c) Amount Direct materials $1,440,000 25.4% $4,240,000 74.6% $5,680,000 Direct labor 480,000 33.3% 960,000 66.7% 1,440,000 Manufacturing overhead 660,000 33.3% 1,320,000 66.7% 1,980,000 Total cost assigned to products $2,580,000 $6,520,000 $9,100,000 Activity-Based Costing System Direct costs: Direct materials $1,440,000 25.4% $4,240,000 74.6% $5,680,000 Direct labor 480,000 33.3% 960,000 66.7% 1,440,000 Indirect costs: Supporting direct labor 261,200 33.3% 522,400 66.7% 783,600 Batch setups 330,000 66.7% 165,000 33.3% 495,000 Product sustaining 301,200 50.0% 301,200 50.0% 602,400 Total cost assigned to products $2,812,400 $6,188,600 9,001,000 Costs not assigned to products: Other 99,000 Total cost $9,100,000 Problem 7-17 (continued) The traditional and activity-based cost assignments differ for two reasons. First, the traditional system assigns all $1,980,000 of manufacturing overhead to products. The ABC system assigns only $1,881,000 of manufacturing overhead to products. The ABC system does not assign the $99,000 of Other activity costs to products because they represent organization-sustaining and idle capacity costs. Second, the traditional system uses one unit-level activity measure, direct labor hours, to assign 33.3% of all overhead to the Xtreme product line and 66.7% of all overhead to the Pathfinder product line. The ABC system assigns 66.7% of Batch setup costs (a batch-level activity) to the Xtreme product line and 33.3% to the Pathfinder product line. The ABC system assigns 50% of Product sustaining costs (a product-level activity) to each product line.