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Kragan Clothing Company manufactures its own designed

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Kragan Clothing Company manufactures its own designed and labeled sports attire
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 material costs. Its direct
material costs for the month of March for Kragan’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 Driver    Overhead Rate # of Cost Drivers
Sales commissions  Dollar sales   $0.05  900,000
Advertising - TV/Radio  Minutes   $300.00  250
Advertising - Newspaper  Column inches   $10.00  2,000
Catalogs  Catalogs mailed   $2.50  60,000
Cost of catalog sales  Catalog orders   $1.00  9,000
Credit and collection  Dollar sales   $0.03  900,000

Instructions
(a) 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.
(b) By what amount does the traditional product costing system undercost or overcost the
“high-intensity” product line?
(c) Classify each of the activities as value-added or non–value-added.

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