PROBLEM 617 Comparing Traditional and Activity-Based Product Margins [LO 61, LO 63, LO 64, LO 65]

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

	Xtreme	Pathfinder
Selling price per unit	$140.00	$99.00
Direct materials per unit	$72.00	$53.00
Direct labor per unit	$24.00	$12.00
Direct labor-hours per unit	2.0 DLHs	1.0 DLHs
Estimated annual production and sales	20,000 units	80,000 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	$1,980,000
Estimated total direct labor-hours	120,000 DLHs

Required:

1. Using Exhibit 613 as a guide, compute the product margins for the Xtreme and the Pathfinder products under the companys 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	Xtreme	Expected Activity Pathfinder	Total
   Supporting direct labor (direct labor-hours)	$783,600	40,000	80,000	120,000
   Batch setups (setups)	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

   Page 265Using Exhibit 611 as a guide, compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system.

3. Using Exhibit 614 as a guide, prepare a quantitative comparison of the traditional and activity-based cost assignments. Explain why the traditional and activity-based cost assignments differ.