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	$	44		$	71
Direct labor cost per unit		18			34
Sales price per unit		365			574
Expected production per month		800	units		350	units

Harbour has monthly overhead of $180,010, which is divided into the following cost pools:

Setup costs	$	79,050
Quality control		65,760
Maintenance		35,200
Total	$	180,010

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

	Home	Work	Total
Number of setups	44	49	93
Number of inspections	340	345	685
Number of machine hours	1,300	1,900	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

1.
Predetermined Overhead rate = $180010 / 3200 = $56.25 per machine hour

Amount of Overhead assigned

Home	$             73,129
Work	$           106,881
Total	$           180,010

2.

Product Cost
	Home	Work
Direct Material	$             35,200	$           24,850
Direct Labor cost	$             14,400	$           11,900
Overhead	$             73,129	$         106,881
Total Product cost	$           122,729	$         143,631
Units	800	350
Product Cost per unit	$             153.41	$           410.37

3.

	Home	Work
Product Cost per unit	$             153.41	$           410.37
Selling Price	$             365.00	$           574.00
Gross Margin per unit	$             211.59	$           163.63

4.

Cost	Cost Driver	Activity	Overhead	Cost per cost driver
Setup Costs	Number of Setups	93	$   79,050	$               850
Quality Control	Number of Inspections	685	$   65,760	$                 96
Maintenance	Machine hours	3200	$   35,200	$                 11
Total			$ 180,010

5.

	Home	Work
Overhead
Setup Costs	$             37,400	$           41,650
Qulaity Control	$             32,640	$           33,120
Maintenance	$             14,300	$           20,900
Total	$             84,340	$           95,670

6.

Product Cost
	Home	Work
Direct Material	$             35,200	$           24,850
Direct Labor cost	$             14,400	$           11,900
Overhead
Setup Costs	$             37,400	$           41,650
Qulaity Control	$             32,640	$           33,120
Maintenance	$             14,300	$           20,900
Total Product cost	$           133,940	$         132,420
Units	800	350
Product Cost per unit	$             167.43	$           378.34

7.

	Home	Work
Product Cost per unit	$             167.43	$           378.34
Selling Price	$             365.00	$           574.00
Gross Margin per unit	$             197.58	$           195.66

8.

	Home	Work
Home	$             211.59	$           197.58
Work	$             163.63	$           195.66