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	$	42		$	69
Direct labor cost per unit		21			31
Sales price per unit		368			576
Expected production per month		670	units		480	units

Harbour has monthly overhead of $219,720, which is divided into the following cost pools:

Setup costs	$	92,020
Quality control		61,200
Maintenance		66,500
Total	$	219,720

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

	Home	Work	Total
Number of setups	43	64	107
Number of inspections	350	370	720
Number of machine hours	1,000	2,500	3,500

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.)

	Overhead Assigned Home Model: Work Model: Total Overhead Cost $0

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.)

	Home Work Unit Cost

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.)

	Home Work Gross Margin

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

	Setup Costs Setups Quality Control Inspections Maintenance Machine Hours

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

	Overhead Assigned To Home Overhead Assigned To Work Setup Costs Quality Control Maintenance Total Overhead Cost $0 $0

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.)

	Home Work Unit Cost

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.)

	Home Work Gross Margin

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

	Home Work Gross Margin (Traditional) Gross Margin (ABC)

Answer 1

Question 1

Predetermined Overhead Rate = Total Estimated Manufacturing Overhead / Total Machine Hours

Total Estimated Manufacturing Overhead = $ 219,720

Total Machine Hours = 3,500 Hours

Predetermined Overhead Rate = 219,720 / 3,500

Predetermined Overhead Rate = $ 62.78 per Machine Hour

Formula for Overhead Assigned = Machine Hours per Tablet Model * Predetermined Overhead Rate

For Home Model

Overhead Assigned = 1,000 Machine Hours * $ 62.78 per Machine Hour

Overhead Assigned = $ 62,777

For Work Model

Overhead Assigned = 2,500 Machine Hours * $ 62.78 per Machine Hour = $ 156,943

Question 2

Particulars	Home Model	Work Model
Direct Materials per Unit	42	69
Direct Labour per Unit	21	31
Manufacturing Overhead per Unit	93.70	326.96
Product Cost per Unit	156.70	426.96

Notes

Product Costs per Unit = Direct Materials Cost per Unit + Direct Labour Cost per Unit + Manufacturing Overhead per Unit

Overhead per Home Model = 62,777 / 670 Units = $ 93.70 per Unit

Overhead per Work Model = 156,943 / 480 Units = $ 326.96

Question 3

Particulars	Home Model	Work Model
Sales Price per Unit	368	576
Less: Product Cost per Unit	156.70	426.96
Gross Margin	211.30	149.04

Question 4

Particulars	Estimated Cost	Total Quantity of Cost Driver	Activity Allocation Rate
Setup Costs	92,020	107	860	Per Setup
Quality Control Costs	61,200	720	85	Per Inspection
Maintenance Costs	66,500	3,500	19	Per Machine Hour
Total Overhead Costs	219,720

Activity Allocation Rate = Estimated Costs / Total Quantity of Cost Driver

Question 5

Particulars	Activity Allocation Rate	Quantity of Cost Driver for Home Model	Total Overhead Costs
Setup Costs	860	43	36,980
Quality Control Costs	85	350	29,750
Maintenance	19	1,000	19,000
Total Overhead Costs for Home Model			85,730

Particulars	Activity Allocation Rate	Quantity of Cost Driver for Work Model	Total Overhead Costs
Setup Costs	860	64	55,040
Quality Control Costs	85	370	31,450
Maintenance	19	2,500	47,500
Total Overhead Costs for Work Model			133,990

Total Overhead Costs = Activity Allocation Rate * Quantity of Cost Driver for Respective Product

Question 6

Using Activity Based Costing

Particulars	Home Model	Work Model
Direct Materials per Unit	42	69
Direct Labour per Unit	21	31
Manufacturing Overhead per Unit	127.96	279.15
Product Cost per Unit	190.96	379.15

Manufacturing Overhead Cost per Unit of Home Model = 85,730 / 670 = $ 127.96 per Unit

Manufacturing Overhead Cost per Unit of Work Model = 133,990 / 480 = $ 279.15 per Unit

Question 7

As per Activity Based Costing

Particulars	Home Model	Work Model
Sales Price per Unit	368	576
Less: Product Cost per Unit	190.96	379.15
Gross Margin per Unit	177.04	196.85

Question 8

Particulars	Home Model	Work Model
Gross Margin as per Traditional Costing	211.30	149.04
Gross Margin as per Activity Based Costing	177.04	196.85

Notes for all the parts of Questions

As there were fraction in the figures the normal rounding off has been done upto two decimal places.