The company has a traditional costing system in which manufacturing overhead is

Question

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:

Required:

1. Compute the product margins for the Xtreme and the Pathfinder products under the company’s 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):

Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system.

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.

Xtreme Pathfinder Selling price per unit $ 116.00 $ 80.00 Direct materials per unit $ 64.00 $ 52.00 Direct labor per unit $ 12.00 $ 8.00 Direct labor-hours per unit 1.5 DLHs 1.0 DLHs Estimated annual production and sales 29,000 units 76,000 units @E! sung:01PM Janee a E O Safari File Edt wew History Bookmarks window Help Chapter 7 Homework problems Help Snve&ExiSubmit; 3 Requred Required 21 Requlrec3 Rourd your interm diate calculations to 2 Prepare quantitatre compansan ar the traditional dnd attivity-based txst assignments. dedmal places.) 10 parts %of % Traciticna Cos Syatenm Diract materias Manufcturirg overhead oal cas assianed to products Xtreme Total of %of Atisity-Bsed Cuing System Dirett malerials Indirect ccsis al sassigned to products Cess noassianed to products

Explanation / Answer

PART A : COMPUTATION OF PROFITABILITY UNDER TRADITIONAL COSTING SYSTEM :

Total manufacturing overheads is $1,912,000 and total direct labour hours is 119,000.

Hence manufacturing overhead/ direct labour hour is $16. (1912000/119000).

24

(16*1.5)

16

(16*1)

PART 2 : CALCULATION OF PROFITABILITY ON THE BASIS OF ACTIVITY BASED COSTING METHOD :

TABLE SHOWING CALCULATION OF PER UNIT COST OF EACH COST DRIVER

TABLE SHOWING ALLOCATION OF MANUFACTURING OVERHEADS :

(2)

TABLE SHOWING PROFITABILITY AS PER ABC METHOD :

all the figures are taken from previous calculations.

PART 3 : QUANTITATIVE COMPARISON OF TRADITIONAL AND ACTIVITY BASED COSTING METHOD :

PARTICULARS XTREME PATHFINDER UNIT COST TOTAL COST UNIT COST TOTAL COST (1) 29,000*(1) (2) 76,000*(2) Selling price (i) 116 3,364,000 80 6,080,000 Costs: Direct material 64 1,856,000 52 3,952,000 Direct labour 12 348,000 8 608,000 Manufacturing overheads alloted on the basis of direct labour hours

24

(16*1.5)

696,000

16

(16*1)

1,216,000 Total costs (ii) 100 2,900,000 76 5,776,000 Profits in $ per unit (i)-(ii) 16 464,000 4 304,000 Profit margin % 13.79% 5%

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