PROBLEM 6-18 Comparing Traditional and Activity-Based Product Margin (LO 61, LO 6-3, LO 6-4, LO 6-5)

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PROBLEM 6-18 Comparing Traditional and Activity-Based Product Margin (LO 61, LO 6-3,
LO 6-4, LO 6-5).

 

P6-18 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…………………………………………… $ 127. 00                    $89. 00
Direct materials per unit……………………………………..    64. 80              51.00
Direct labor per unit ……………………………………………  18. 20                        13.00
Direct labor hours per unit …………………………………     1. 4 DLHs        1.0 DLHs
Estimated annual production and sales………………              25, 000 units    75,000 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, 200, 000
Estimated total direct labor-hours ………………………………….110, 000 DLHs

 

REQUIRED:
1. Using Exhibit 6-12 as a guide, compute the product margins for the Xactive and the Path breaker products under the company’s traditional costing system.
2. The company I 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 (Other cost pool includes organizationsustaining costs and idle capacity costs):

                                                                        Estimated         Expected Activity
Activities and Activity Measures              Overhead cost         Xactive                        Pathbreaker      Total
Supporting direct labor (direct labor-hours)       $ 797, 500     35,000             75,000              110, 000
Batch setups (setups)……………………         680, 000          250                  150                    400
Batch setups…………………………               650, 000          1                      1                      2
Other……………………………………………72, 500                        NA                   NA                   NA
Total manufacturing overhead cost………….. $2, 200, 000

 

Using Exhibit 6-10 as a guide, compute the product margins for the Xactive and the Path-breaker products under the activity-based costing system.
3. Using Exhibit 6-13 as a guide, prepare a quantitative comparison of the traditional and activity-based cost assignment. Explain why the traditional and activity-based cost assignments differ.

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