| 1. |
Compute the product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system.
3.
Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Do
not round intermediate calculations. Round your "Percentage" answer to 1
decimal place. (i.e. .1234 should be entered as 12.3))
Explanation:
1.
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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
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| Estimated total direct labor-hours |
| | = |
$2,230,000
| = | $20.00 per DLH |
| 111,500 DLHs* |
|
*31,000
units of Xtreme @ 1.5 DLH per unit + 65,000 units of the Pathfinder @ 1
DLH per unit = 46,500 DLHs + 65,000 DLHs = 111,500 DLHs
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Consequently, the product margins using the traditional approach would be computed as follows:
|
| | | Xtreme | Pathfinder | | Total |
| Sales | $ | 3,751,000 | $ | 5,590,000 | $ | 9,341,000 |
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| Direct materials | | 2,024,300 | | 3,380,000 | | 5,404,300 |
| Direct labor | | 418,500 | | 585,000 | | 1,003,500 |
Manufacturing overhead
applied @ $20.00 per direct labor-hour | | 930,000 | | 1,300,000 | | 2,230,000 |
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| Total manufacturing cost | | 3,372,800 | | 5,265,000 | | 8,637,800 |
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| Product margin | $ | 378,200 | $ | 325,000 | $ | 703,200 |
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Note that all of the manufacturing overhead cost is applied to the products under the company’s traditional costing system.
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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 | $ | 724,750 | 111,500 | DLH | $ | 6.50 | per DLH |
| Batch setups | $ | 975,000 | 750 | setups | $ | 1,300 | per setup |
| Product sustaining | $ | 470,000 | 2 | products | $ | 235,000 | per product |
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*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.
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| Under the activity-based costing system, the product margins would be computed as follows: |
| | | Xtreme | | Pathfinder | | Total |
| Sales | $ | 3,751,000 | $ | 5,590,000 | $ | 9,341,000 |
| |
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| Direct materials | | 2,024,300 | | 3,380,000 | | 5,404,300 |
| Direct labor | | 418,500 | | 585,000 | | 1,003,500 |
| Supporting direct labor | | 302,250 | | 422,500 | | 724,750 |
| Batch setups | | 546,000 | | 429,000 | | 975,000 |
| Product sustaining | | 235,000 | | 235,000 | | 470,000 |
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| Total cost | | 3,526,050 | | 5,051,500 | | 8,577,550 |
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| Product margin | $ | 224,950 | $ | 538,500 | $ | 763,450 |
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3.
| The quantitative comparison is as follows: |
| Traditional Cost System | Xtreme | Pathfinder |
| Direct materials | $2,024,300 / $5,404,300 = 37.5% | $3,380,000 / $5,404,300 = 62.5% |
| Direct labor | $418,500 / $1,003,500 = 41.7% | $585,000 / $1,003,500 = 58.3% |
| Manufacturing overhead | $930,000 / $2,230,000 = 41.7% | $1,300,000 / $2,230,000 = 58.3% |
| | | |
| Activity-Based Costing System | | |
| Direct costs: | | |
| Direct materials | $2,024,300 / $5,404,300 = 37.5% | $3,380,000 / $5,404,300 = 62.5% |
| Direct labor | $418,500 / $1,003,500 = 41.7% | $585,000 / $1,003,500 = 58.3% |
| Indirect costs: | | |
| Supporting direct labor | $302,250 / $724,750 = 41.7% | $422,500 / $724,750 = 58.3% |
| Batch setups | $546,000 / $975,000 = 56.0% | $429,000 / $975,000 = 44.0% |
| Product sustaining | $235,000 / $470,000 = 50.0% | $235,000 / $470,000 = 50.0% |
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