Question

Kragan Clothing Company manufactures its own designed and labeled athletic wear and sells its products through catalog sales and retail outlets. While Kragan has for years used activity-based costing in its manufacturing activities, it has always used traditional costing in assigning its selling costs to its product lines. Selling costs have traditionally been assigned to Kragan’s product lines at a rate of 70% of direct materials costs. Its direct materials costs for the month of March for Kragan’s “high-intensity” line of athletic wear are $409,000. The company has decided to extend activity-based costing to its selling costs. Data relating to the “high-intensity” line of products for the month of March are as follows.

Activity Cost Pools		Cost Drivers		Overhead Rate			Number of Cost Drivers Used per Activity
Sales commissions		Dollar sales		$0.05	per dollar sales		$939,000
Advertising—TV		Minutes		$300	per minute		240
Advertising—Internet		Column inches		$10	per column inch		2,100
Catalogs		Catalogs mailed		$2.50	per catalog		62,200
Cost of catalog sales		Catalog orders		$1	per catalog order		8,900
Credit and collection		Dollar sales		$0.03	per dollar sales		$939,000

1. Compute the selling costs to be assigned to the “high-intensity” line of athletic wear for the month of March (1) using the traditional product costing system (direct materials cost is the cost driver), and (2) using activity-based costing.

2. By what amount does the traditional product costing system undercost or overcost the “high-intensity” product line?

Answer 1

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