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 $ 37 $ 69

Direct labor cost per unit 17 36

Sales price per unit 350 571

Expected production per month 660 units 500 units

Harbour has monthly overhead of $205,200, which is divided into the following cost pools:

Setup costs $ 78,400

Quality control 64,800

Maintenance 62,000

Total $ 205,200

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

Home Work Total

Number of setups 43 55 98

Number of inspections 310 410 720

Number of machine hours 1,000 2,100 3,100

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

Part 1 : Overhead cost assigned to Product line using Traditional costing system with machine hours as the cost driver:

Particulars	Home	Work	Total
Machine Hours	1,000	2,100	3,100
Overhead Cost	$66,194	$139,006	205,200

Working Notes:

Home

Overhead Cost = $205,200 * 1,000 machine hours / 3,100 machine hours = $66,194

Work

Overhead Cost = $205,200 * 2,100 machine hours / 3,100 machine hours = $139,006

Part 2 : Production cost per unit using Traditional costing system

Particulars	Home	Work
Direct Materials	$37	$69
Direct Labor	$17	$36
Overheads	$100.29	$278.01
Total Production cost per unit	$154.29	$383.01

Workings:

Overhead cost per unit

Home

Overhead cost per unit = $66,194 / 660 units = $100.29 per unit

Work

Overhead cost per unit = $139,006 / 500 units = $278.01 per unit

Part 3 : Harbour's gross margin per unit using traditional costing system

Particulars	Home	Work
Sales	$350.00	$571.00
Less: Production cost per unit	$154.29	$383.01
Gross Margin per unit	$195.71	187.99

Part 4 : Activity Rate

Part 5 : Overhead cost assigned to Product line using ABC System

Part 6 : Production cost per unit using ABC System

Particulars	Home	Work
Direct Materials	$37	$69
Direct Labor	$17	$36
Overheads	$124.70	$245.80
Total Production cost per unit	$178.70	$350.80

Workings:

Overhead cost per unit

Home

Overhead cost per unit = $82,300 / 660 units = $124.70 per unit

Work

Overhead cost per unit = $122,900 / 500 units = $245.80 per unit

Part 7 : Harbour's gross margin per unit using ABC system

Particulars	Home	Work
Sales	$350.00	$571.00
Less: Production cost per unit	$178.70	$350.80
Gross Margin per unit	$171.30	$220.20

Part 8 : Comparison

Particulars	Home	Work
Gross Margin using Traditional costing system	$195.71	$187.99
Gross Margin using ABC system	$171.30	$220.20

Home

Gross Margin under ABC costing is lesser than the gross margin under traditional costing system by $24.41 ($195.71 - $171.30).

Work

Gross Margin under ABC costing is higher than the gross margin under traditional costing system by $32.21 ($220.20 - $187.99).

All the best...