Final answer:
Product margins are calculated by accounting for each product's direct material, direct labor, and allocated overhead costs. Under traditional costing, overhead is allocated based on direct labor hours, while activity-based costing uses specific activities to allocate costs. A quantitative comparison between the two systems would reveal differences in profitability for the products.
Step-by-step explanation:
Calculating product margins for Smoky Mountain Corporation involves determining the profit per unit for each type of hiking boot after accounting for direct materials, direct labor, and manufacturing overhead costs. Under a traditional costing system, overhead is applied on the basis of direct labor hours, whereas an activity-based costing system assigns costs based on activities that contribute to overhead, such as supporting direct labor, batch setups, product sustaining, and other costs.
In the traditional system, we divide the total estimated manufacturing overhead by the total estimated direct labor hours to get the overhead rate per direct labor hour, which is then multiplied with the direct labor hours per unit to allocate overhead to each product. Next, we subtract the sum of direct materials, direct labor, and allocated overhead from the selling price to get the product margin for each hiking boot type.
Under the activity-based costing system, we would assign overhead costs based on the activity rates for each cost pool and the extent to which each product uses those activities. This would involve dividing the estimated overhead for each activity by the expected activity levels, and then multiplying these rates by the activity levels (like the number of setups or the number of products) for each product to allocate the costs more accurately.
The quantitative comparison of the traditional and activity-based cost assignments would involve comparing these different product margins to see which product is more or less profitable under each costing system.