Question

Harbour Company makes two models of electronic tablets, the Home and the Work. Basic production information follows:

	Home			Work
Direct materials cost per unit	$	36		$	64
Direct labor cost per unit		19			35
Sales price per unit		356			572
Expected production per month		610	units		440	units

Harbour has monthly overhead of $210,470, which is divided into the following cost pools:

Setup costs	$	80,510
Quality control		65,960
Maintenance		64,000
Total	$	210,470

The company has also compiled the following information about the chosen cost drivers:

	Home	Work	Total
Number of setups	38	59	97
Number of inspections	300	380	680
Number of machine hours	1,400	1,800	3,200

Required:
1. Suppose Harbour uses a traditional costing system with machine hours as the cost driver. Determine the amount of overhead assigned to each product line. (Do not round intermediate calculations and round your final answers to the nearest whole dollar amount.)

2. Calculate the production cost per unit for each of Harbour’s products under a traditional costing system. (Round your intermediate calculations and final answers to 2 decimal places.)

3. Calculate Harbour’s gross margin per unit for each product under the traditional costing system. (Round your intermediate calculations and final answers to 2 decimal places.)

4. Select the appropriate cost driver for each cost pool and calculate the activity rates if Harbour wanted to implement an ABC system.

5. Assuming an ABC system, assign overhead costs to each product based on activity demands.

6. Calculate the production cost per unit for each of Harbour’s products in an ABC system. (Round your intermediate calculations and final answers to 2 decimal places.)

7. Calculate Harbour’s gross margin per unit for each product under an ABC system.(Round your intermediate calculations and final answers to 2 decimal places.)

8. Compare the gross margin of each product under the traditional system and ABC. (Round your answers to 2 decimal places.)

Answer 1

Ans. Calculation of amount of overhead assigned each product (all value in $)

Overhead

Setup cost             = 80510

Quality control cost = 65960

Maintenance          = 64000

Total overhead        = 210470

Cost driver is machine hours = 3200 hours

per machine hour rate = 210470/3200 =65.77

Allocation of overhead under the traditional method

Home (210470/3200)X1400   = 92080

Work (210470/3200)X1800 = 118390

Unit of production for home = 610

Unit of production of work    = 440

Overhead cost per unit for home = 92080/610 = 150.95

Overhead cost per unit for work = 118390/440 =269.07

2. Calculation of Product cost per unit under traditional costing system

                                          Home               Work

Raw material                         36                   64

Direct labour                         19                   35

Overhead per unit               150.95             269.07

Production cost per unit      205.95            368.07

3. Calculation of Gross margin per unit under the traditional costing system

                                      Home              Work

Sale value per unit             356                 572

Prodution cost per unit     (205.95)           (368.07)

Gross margin per unit       150.05             203.93

4. Calculation of Activity rates if Harbour wantes to implement ABC costing system

Activity               Cost            Driver            No of activity        Rate per activity

Setup cost                        80510           No of setup          97                            830    (80510/97)

Quality control cost 65960           No of inspections 680                          97      (65960/680)

Maintenance                     64000          machine hours       3200                        20      (64000/3200)

5. Calculation of overhead cost each product under ABC costing system

                                  Home                 Work     Total      

Setup cost (38X830),(59X830)          31540    48970          80510

Quality control cost (300X97),(380X97) 29100    36860          65960

Maintenance cost (1400X20),(1800X20)    28000    36000          64000

Total Overhead           88640    121830    210470

No of unit production     610 440

Overhead Cost per unit 145.31    276.88

6. Calculation of production cost per unit under the ABC costing system

                                         Home               Work

Raw material                         36                   64

Direct labour                         19                   35

Overhead per unit               145.31             276.88

Production cost per unit      200.31            375.88

7. Calculation of Gross margin under ABC costing system

                                          Home               Work

Selling price unit                          356                   572

Production cost per unit              (200.31)             (375.88)

Gross margin per unit                  155.69               196.12