Friday, 26 September 2014

Rocky Mountain Corporation makes two types of hiking boots—Xactive and the Pathbreaker. Data concerning these two product lines appear below:

Rocky Mountain Corporation makes two types of hiking boots—Xactive and the Pathbreaker. Data concerning these two product lines appear below:
  
  Xactive Pathbreaker
  Selling price per unit $ 120.00   $ 92.00  
  Direct materials per unit $ 63.50   $ 54.00  
  Direct labor per unit $ 13.50   $ 9.00  
  Direct labor-hours per unit   1.5  DLHs   1.0  DLHs
  Estimated annual production and sales   24,000  units   71,000  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 $2,033,000           
  Estimated total direct labor-hours 107,000 DLHs  

  
Required:
1.
Compute the product margins for the Xactive and the Pathbreaker products under the company’s traditional costing system. (Loss amounts should be indicated with a minus sign. Omit the "$" sign in your response.)
  
           Xactive           Pathbreaker          Total
  Product margin $   $   $  

  
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
Expected Activity
  Activities and Activity Measures Overhead Cost Xactive Pathbreaker Total
  Supporting direct labor (direct labor-hours) $ 663,400   36,000    71,000    107,000  
  Batch setups (setups)   572,000   240    200    440  
  Product sustaining (number of products)   750,000   1    1    2  
  Other   47,600   NA    NA    NA  
 

     
  Total manufacturing overhead cost $ 2,033,000        
 



     

  
Compute the product margins for the Xactive and the Pathbreaker products under the activity-based costing system. (Loss amounts should be indicated with a minus sign. Round your intermediate calculations to 2 decimal places and final answers to the nearest dollar amount. Omit the "$" sign in your response.)
  
             Xactive           Pathbreaker           Total
  Product margin $    $     $   

  
3.
Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Do not round intermediate calculations. Round your percentage answers to one decimal place and other answers to the nearest dollar amount. Omit the "$" & "%" signs in your response.)
  
  Xactive Pathbreaker Total
                 Amount % of
Total Amount
           Amount % of
Total Amount
        Amount
  Traditional Cost System          
  Direct materials $   %   $   %   $  
  Direct labor   %     %    
  Manufacturing overhead    %      %     
 
 
 
  Total cost assigned to products $     $     $  
 

 

 

           
  Activity-Based Costing System          
  Direct costs:          
    Direct materials $   %   $   %   $  
    Direct labor   %     %    
  Indirect costs:          
    Supporting direct labor   %     %    
    Batch setups   %     %    
    Product sustaining    %      %     
 
 
 
  Total cost assigned to products $     $     $  
 

 

   
  Costs not assigned to products:          
    Other           
         
  Total cost         $  
         



rev: 12_19_2011



Explanation: 1.
Under the traditional direct labor-hour based costing system, manufacturing overhead is applied to products using the predetermined overhead rate computed as follows:

  Predetermined
overhead rate
=
Estimated total manufacturing overhead cost
Estimated total direct labor-hours

=
$2,033,000
= $19.00 per DLH
107,000 DLHs*

*24,000 units of Xactive @ 1.5 DLH per unit + 71,000 units of the Pathbreaker @ 1 DLH per unit = 36,000 DLHs + 71,000 DLHs = 107,000 DLHs

Consequently, the product margins using the traditional approach would be computed as follows:

    Xactive    Pathbreaker   Total
  Sales $ 2,880,000   $ 6,532,000   $ 9,412,000  
 





  Direct materials   1,524,000     3,834,000     5,358,000  
  Direct labor   324,000     639,000     963,000  
  Manufacturing overhead
    applied @ $19.00 per direct labor-hour
  684,000     1,349,000     2,033,000  
 





  Total manufacturing cost   2,532,000     5,822,000     8,354,000  
 





  Product margin $ 348,000   $ 710,000   $ 1,058,000  
 













Note that all of the manufacturing overhead cost is applied to the products under the company's traditional costing system.

2.
The first step is to determine the activity rates:

  (a) (b) (a) ÷ (b)
  Activity Cost Pool Total cost Total activity Activity Rate
  Supporting direct labor $ 663,400   107,000  DLH $ 6.20  per DLH
  Batch setups $ 572,000   440  setups $ 1,300  per setup
  Product sustaining $ 750,000   2  products $ 375,000  per product


*The Other activity cost pool is not shown above because it includes organization-sustaining and idle capacity costs that should not be assigned to products.

Under the activity-based costing system, the product margins would be computed as follows:

    Xactive   Pathbreaker   Total
  Sales $ 2,880,000   $ 6,532,000   $ 9,412,000  
 





  Direct materials   1,524,000     3,834,000     5,358,000  
  Direct labor   324,000     639,000     963,000  
  Supporting direct labor   223,200     440,200     663,400  
  Batch setups   312,000     260,000     572,000  
  Product sustaining   375,000     375,000     750,000  
 





  Total cost   2,758,200     5,548,200     8,306,400  
 





  Product margin $ 121,800   $ 983,800   $ 1,105,600  
 













3.
Traditional Cost System Xactive Pathbreaker
Direct materials $1,524,000 / $5,358,000 = 28.4% $3,834,000 / $5,358,000 = 71.6%
Direct labor $324,000 / $963,000 = 33.6% $639,000 / $963,000 = 66.4%
Manufacturing overhead $684,000 / $2,033,000 = 33.6% $1,349,000 / $2,033,000 = 66.4%
     
Activity-Based Costing System    
Direct costs:    
  Direct materials $1,524,000 / $5,358,000 = 28.4% $3,834,000 / $5,358,000 = 71.6%
  Direct labor $324,000 / $963,000 = 33.6% $639,000 / $963,000 = 66.4%
Indirect costs:    
  Supporting direct labor $223,200 / $663,400 = 33.6% $440,200 / $663,400 = 66.4%
  Batch setups $312,000 / $572,000 = 54.5% $260,000 / $572,000 = 45.5%
  Product sustaining $375,000 / $750,000 = 50.0% $375,000 / $750,000 = 50.0%