Selecting Cost Drivers, Assigning Costs Using Activity Rates
Gutierrez Company makes two models of portable camping stove, the Sportsman and the Expedition.
Basic production information follows:
| Sportsman | Expedition |
Direct materials cost per unit | $20 | $ 28 |
Direct labor cost per unit | $15 | $ 19 |
Sales price per unit | $82 | $105 |
Expected production per month | 1,200 units | 960 units |
Gutierrez has monthly overhead of $11,180, which is divided into the following cost pools:
Setup costs | $ 2,600 |
Quality control | 5,500 |
Maintenance | 3,080 |
Total | $11,180 |
The company has also compiled the following information about the chosen cost drivers:
| Sportsman | Expedition | Total |
Number of setups | 14 | 26 | 40 |
Number of inspections | 140 | 300 | 440 |
Number of machine hours | 1,400 | 1,400 | 2,800 |
Required:
1.Suppose Gutierrez used a traditional costing system with machine hours as the cost driver. Determine the amount of overhead assigned to each product line.
2. Calculate the production cost per unit for each of Gutierrez's products under a traditional costing system.
3. Calculate Gutierrez's gross margin per unit for each product under the traditional costing system.
4. Select the appropriate cost driver for each cost pool and calculate the activity rates if Gutierrez 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 Gutierrez's products with an ABC system.
7. Calculate Gutierrez's gross margin per unit for each product under an ABC system.
8. Compare the gross margin of each product under the traditional system and ABC.
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