Problem $1$: Activity Based Costing.

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

Xtreme

Pathfinder

Selling price per unit

$ $150\mathrm{.}00$

$ $100\mathrm{.}00$

Direct materials per unit

$ $82\mathrm{.}00$

$ $63\mathrm{.}00$

Direct labor per unit

$ $25\mathrm{.}00$

$ $13\mathrm{.}00$

Direct labor$-$hours per unit

$2\mathrm{.}0$

DLHs

$1\mathrm{.}0$

DLH

Estimated annual production and sales

$22,000$

units

$90,000$

units

The company has a traditional costing system that applies manufacturing overhead 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

$ $$1,980,000$

Estimated total direct labor$-$hours

$134,000$

DLHs

Required:

On the answer sheet, under the traditional direct labor$-$hour based costing system, compute the company$$s predetermined overhead rate which use to apply manufacturing overhead. Show your work.

On the table in the answer sheet compute the product margin for each product for the traditional cost system $($See answer sheet$).$

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

Expected Activity

Xtreme

Pathfinder

Total

Supporting direct labor $($direct labor$-$hours$)$

$ $783,600$

$44,000$

$90,000$

$134,000$

Batch setups $($setup s$)$

$495,000$

$200$

$100$

$300$

Product sustaining $($number of products$)$

$602,400$

$1$

$1$

$2$

Other

$99,000$

NA

NA

NA

Total manufacturing overhead cost

$ $1,980,000$

$3.$ Using the table on the answer sheet, compute the activity rate for each activity pool.

$4.$ Using the table on the answer sheet, compute the product margins for Xtreme and Pathfinder under the activity$-$based costing.

$5.$ On the answer sheet, answer the following question: Briefly explain why the product margin differs between the traditional costs system and the ABC system. Which system more accurately reflects each products costs $($why$?).$