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Lim Clothing Company

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Lim Clothing Company manufactures its own designed and labeled sports attire and sells its products through catalog sales and retail outlets. While Lim 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 Lim's product lines at a rate of 70% of direct material costs. Its direct material costs for the month of March for Lim's "high intensity" line of attire are $400,000. 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 $930,000
Advertising-TV/Radio Minutes $300 per minute 250
Advertising-Newspaper Column inches $10 per column inch 2,000
Catalogs Catalogs mailed $2.50 per catalog 60,000
Cost of catalog sales Catalog orders $1 per catalog order 9,000
Credit and collection Dollar sales $0.03 per dollar sales $930,000
Instructions
1. Compute the selling costs to be assigned to the "high-intensity" line of attire for the month of March: (1) using the traditional product costing system (direct material 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?
3. Classify each of the activities as value-added or non-value-added.

1._________________ Selling Costs
a. ______________Traditional
b. ______________ Activity-base costing
2.__________________Under cost and Overcost
3.__________________Value-added or non value-added
a. ________________ TV / Radio advertising
b. ________________Newspaper Advertising
c. ________________Catalogs
d. ________________ Credit and Collection

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Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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