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.