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%