Question
Smoky Mountain Corporation makes two types of hiking bootsthe Xtreme and the Pathfinder. Data concerning these two product lines appear below: Xtreme Pathfinder Selling price
Smoky Mountain Corporation makes two types of hiking bootsthe Xtreme and the Pathfinder. Data concerning these two product lines appear below:
Xtreme | Pathfinder | |||||
Selling price per unit | $ | 121.00 | $ | 86.00 | ||
Direct materials per unit | $ | 65.30 | $ | 52.00 | ||
Direct labor per unit | $ | 13.50 | $ | 9.00 | ||
Direct labor-hours per unit | 1.5 | DLHs | 1.0 | DLHs | ||
Estimated annual production and sales | 31,000 | units | 65,000 | 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 | $ | 2,230,000 | ||
Estimated total direct labor-hours | 111,500 | DLHs | ||
Required:
1. Compute the product margins for the Xtreme and the Pathfinder products under the companys 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) | $ | 724,750 | 46,500 | 65,000 | 111,500 | |
Batch setups (setups) | 975,000 | 420 | 330 | 750 | ||
Product sustaining (number of products) | 470,000 | 1 | 1 | 2 | ||
Other | 60,250 | NA | NA | NA | ||
Total manufacturing overhead cost | $ | 2,230,000 | ||||
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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