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

	Xtreme	Pathfinder
Selling price per unit	$	120.00		$	87.00
Direct materials per unit	$	63.60		$	55.00
Direct labor per unit	$	12.00		$	10.00
Direct labor-hours per unit		1.2	DLHs		1.0	DLHs
Estimated annual production and sales		25,000	units		72,000	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	$	2,040,000
Estimated total direct labor-hours		102,000	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):

	Estimated Overhead Cost	Expected Activity
Activities and Activity Measures	Xtreme	Pathfinder	Total
Supporting direct labor (direct labor-hours)	$	622,200		30,000	72,000	102,000
Batch setups (setups)		644,000		250	210	460
Product sustaining (number of products)		700,000		1	1	2
Other		73,800		NA	NA	NA
Total manufacturing overhead cost	$	2,040,000

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

Complete this question by entering your answers in the tabs below.

Required 1
Required 2
Required 3

Compute the product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system. (Round your intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)

	Xtreme	Pathfinder	Total
Product margin			$0

Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system. (Round your intermediate calculations to 2 decimal places.)

	Xtreme	Pathfinder	Total
Product margin			$0

Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Round your intermediate calculations to 2 decimal places and "Percentage" answers to 1 decimal place.)

	Xtreme	Pathfinder	Total
		% of		% of
	Amount	Total Amount	Amount	Total Amount	Amount
Traditional Cost System
			%			%
			%			%
			%			%
Total cost assigned to products	$0			$0			$0

	Xtreme	Pathfinder	Total
		% of		% of
	Amount	Total Amount	Amount	Total Amount	Amount
Activity-Based Costing System
Direct costs:
			%			%
			%			%
Indirect costs:
			%			%
			%			%
			%			%
Total cost assigned to products	$0			$0			$0
Costs not assigned to products:

Total cost							$0

Required 2

Expert Solution

Step 1

Activity-based costing is a contemporary method of overhead cost allocation that requires the classification of overhead costs into various cost pools. Costs can be classified as unit-level, batch-level, product-level or organization-sustaining level. Once overhead costs have been classified into relevant costs pools, a cost driver will need to be selected for each pool. A cost driver is an activity that drives up overhead costs within the cost pool. Examples of cost drivers include machine hours and number of batches produced. An activity rate will subsequently be calculated based on the selected cost driver. The formula for calculating activity rate is budgeted overhead costs for each cost pool divided by budgeted quantity of cost driver. Overhead costs from each cost pool will then be applied to products based on the activity rate. Total overhead costs for each product will be calculated by adding overhead costs applied from each cost pool. The ABC system will typically be a more accurate method for overhead cost allocation as compared to the traditional method.

Smoky Mountain Corporation makes two types of hiking boots—the Xtreme and the Pathfinder. Data concerning these two product lines appear below: Xtreme Pathfinder Selling price per unit $ 120.00 $ 87.00 Direct materials per unit $ 63.60

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