Smoky Mountain Corporation makes two types of hiking bootsth

Smoky Mountain Corporation makes two types of hiking boots—the Xtreme and the Pathfinder. Data concerning these two product lines appear below:

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:

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):

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.

	Xtreme	Pathfinder
Selling price per unit	$	120.00		$	90.00
Direct materials per unit	$	64.10		$	53.00
Direct labor per unit	$	13.50		$	9.00
Direct labor-hours per unit		1.5	DLHs		1.0	DLHs
Estimated annual production and sales		30,000	units		70,000	units

Solution

Part 1 - Product Margin Under traditional coating system

Predetermined overhead rate = Total budgeted manufacturing overhead/Total allocation base i.e. direct labour hours

Predetermined overhead rate = $2300000/115000 = $20 per labour hour

$3600000

($120 * 30000)

$6300000

($90 * 70000)

$1923000

($64.1*30000)

$3710000

($53*70000)

$405000

($13.5*30000)

$630000

($9*70000)

$900000

($20 per labour hour * 1.5 hours per unit) * 30000 units

$1400000

($20 per labour hour * 1.0 hours per unit) * 70000 units

$372000

$560000

Part 2 - Profit margin under activity based costing

Step 1 - Allocation of manufacturing overhead as per activity cost drivers

Step 2 - Calculation of Profit Margin

$382500

($8.5 per hour * 45000)

$595000

($8.5 per hour * 70000 hours)

$360000

($1200 per setup*300 setup)

$252000

($1200 per setup*210 setup)

Part 3 - Quantitative analysis

Step 1 - quantitative analysis Under traditional costing system

34.14%

($1923000/$5633000)*100

65.86%

($3710000/5633000)*100

39.13%

($405000/$1035000)*100

60.87%

($630000/$1035000)*100

39.13%

($900000/$2300000)*100

60.87%

($1400000/$2300000)*100

Step 2 - Quantitative analysis under activity based costing

Particulars	Xtreme	Pathfinder	Total
Sales	$3600000 ($120 * 30000)	$6300000 ($90 * 70000)	$9900000
Direct Material Per unit	$1923000 ($64.1*30000)	$3710000 ($53*70000)	$5633000
Direct labour cost	$405000 ($13.5*30000)	$630000 ($9*70000)	$1035000
Overhead cost	$900000 ($20 per labour hour * 1.5 hours per unit) * 30000 units	$1400000 ($20 per labour hour * 1.0 hours per unit) * 70000 units	$2300000
Net Margin	$372000	$560000	$932000