Homework Soursethtml a search Check my wor omparing Traditional and Activ
Solution
Solution:
Part 1 --- Product Margin under traditional costing system
Product Margin is the difference between selling price and product cost.
Product cost is the cost of making the product.
Under traditional costing, product cost is the sum of direct materials, direct labor, variable manufacturing overhead and fixed manufacturing overhead.
In this costing system, overheads are allocated on the basis of predetermined overhead rate by taking actual activity level achieved by the company.
So, first of all we need to calculate the Predetermined Overhead Rate.
Allocation base is direct labor dollars.
Predetermined overhead rate = Total estimated manufacturing overhead $1,927,800 / Total Estimated Direct labor hours 113,400 = $17 per direct labor hour
Assigning Overheads per unit to each product
Xtreme = Number of Direct Labor Hours required per unit x Overhead Rate per DLH
= 1.70 DLHs x $17
= $28.90 per unit
Pathfinder = Number of Direct Labor Hours required per unit x Overhead Rate per DLH
= 1 DLH x $17
= $17 per unit
Calculation of Product Margin for each product
Product Margin
Xtreme
Pathfinder
Unit Selling Price
$120.00
$87.00
Product Cost:
Direct materials per unit
$63.30
$52.00
Direct labor per unit
$17.00
$10.00
Assigned Manufacturing Overhead (Refer working above)
$28.90
$17.00
Product Cost per unit
$109.20
$79.00
Product Margin (Selling price - Product Cost)
$10.80
$8.00
Part 2 --- Product Margin for each product under Activity Based Costing
Activity Based Costing System
- ABC is a costing method which identifies the activities in the organization and assigns the cost of each activity with resources to all the products or services according to the actual consumption of activity by the product or service.
- This system determines all the activities related to product or production process.
- This system calculates the cost of those activities which are related to product or production process and thereafter determine the cost of the product.
- In ABC costing the overhead costs are distributed to the product on the basis of benefit received from indirect activity.
- It helps to distribution of overheads on the basis of activities.
The Activity based overhead rate = Estimated Overheads related to the activity / Total Cost Driver per activity)
Calculation of Activity Rate and Assigning of Overheads to each product
Xtreme
Pathfinder
Activity Cost Pool
Expected Manufacturing Overhead Costs (A)
Expected Total Activity Cost Driver (B)
Activity Rate (C = A/B)
Activity Driver USAGE (H)
Overhead Assigned (C*H)
Activity Driver USAGE (E)
Overhead Assigned (C*E)
Supporting direct labors
$703,080
113,400
Direct labor hours
$6.20
per hour
37400
$231,880
76000
$471,200
Batch setups
$480,000
400
Setups
$1,200
per setup
220
$264,000
180
$216,000
Product sustaining
$700,000
2
Products
$350,000
per product
1
$350,000
1
$350,000
Other
$44,720
Total Assigned Manufacturing Overhead (A)
$1,927,800
$845,880
$1,037,200
/ Budgeted Production Volume (units) (B)
22000
76000
Applied Manufacturing Overhead Per Unit (A/B)
$38.45
$13.65
Product margin
Product Margin
Xtreme
Pathfinder
Unit Selling Price
$120.00
$87.00
Product Cost:
Direct materials per unit
$63.30
$52.00
Direct labor per unit
$17.00
$10.00
Assigned Manufacturing Overhead (Refer working above)
$38.45
$13.65
Product Cost per unit
$118.75
$75.65
Product Margin (Selling price - Product Cost)
$1.25
$11.35
Part 3 ---
Quantitative Comparison of Traditional and Activity Based Cost assignments
Xtreme
Pathfinder
Total Amount
Amount
% of Total Amount
Amount
% of Total Amount
Traditional Cost System
Direct materials
$1,392,600
26.06%
$3,952,000
73.94%
$5,344,600
Direct Labor
$374,000
32.98%
$760,000
67.02%
$1,134,000
Manufacturing Overhead
$635,800
32.98%
$1,292,000
67.02%
$1,927,800
Total Cost assigned to products
$2,402,400
28.58%
$6,004,000
71.42%
$8,406,400
Activity Based Costing System
Direct Costs:
Direct materials
$1,392,600
26.06%
$3,952,000
73.94%
$5,344,600
Direct Labor
$374,000
32.98%
$760,000
67.02%
$1,134,000
Indirect Costs:
Supporting direct labor
$231,880
32.98%
$471,200
67.02%
$703,080
Batch Setup
$264,000
55.00%
$216,000
45.00%
$480,000
Product Sustaining
$350,000
50.00%
$350,000
50.00%
$700,000
Total Cost assigned to products
$2,612,480
31.24%
$5,749,200
68.76%
$8,361,680
Costs not assigned to products
Other
$44,720
Total Cost
$8,406,400
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
| Product Margin | Xtreme | Pathfinder |
| Unit Selling Price | $120.00 | $87.00 |
| Product Cost: | ||
| Direct materials per unit | $63.30 | $52.00 |
| Direct labor per unit | $17.00 | $10.00 |
| Assigned Manufacturing Overhead (Refer working above) | $28.90 | $17.00 |
| Product Cost per unit | $109.20 | $79.00 |
| Product Margin (Selling price - Product Cost) | $10.80 | $8.00 |
