Problem -
Smoky Mountain Corporation makes two types of hiking boots-Xtreme and the Pathfinder. Data concerning these two product lines appear below:
|
Xtreme
|
Pathfinder
|
|
Selling price per unit
|
$141.00
|
$91.00
|
|
Direct materials per unit
|
$64.50
|
$52.00
|
|
Direct labor per unit
|
$17.00
|
$10.00
|
|
Direct labor-hours per unit
|
1.7 DLHs
|
1.0 DLHs
|
|
Estimated annual production and sales
|
23,000 units
|
74,000 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 - $ 2,714,400
Estimated total direct labor-hours - 113,100 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):
|
Activities and Activity Measures
|
Estimated Overhead Cost
|
Activity
|
|
Xtreme
|
Pathfinder
|
Total
|
|
Supporting direct labor (direct labor-hours)
|
$791,700
|
39,100
|
74,000
|
113,100
|
|
Batch setups (setups)
|
1,062,000
|
340
|
250
|
590
|
|
Product sustaining (number of products)
|
790,000
|
1
|
1
|
2
|
|
Other
|
70,700
|
NA
|
NA
|
NA
|
|
Total manufacturing overhead cost
|
$2,714,400
|
|
|
|
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.