Question

Keller Company makes two models of battery-operated boats, the Sandy Beach and the Rocky River. Basic production information follows:

Sandy Beach Rocky River

Direct materials cost per unit $ 20.00 $ 27.00

Direct labor cost per unit 13.30 17.90

Sales price per unit 82.30 106.00

Expected production per month 1,150 units 990 units

  

Keller has monthly overhead of $11,536, which is divided into the following cost pools:

Setup costs $ 2,360

Quality control 5,400

Maintenance 3,776

Total $ 11,536

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

Sandy Beach Rocky River Total

Number of setups 15 25 40

Number of inspections 200 250 450

Number of machine hours 1,600 1,600 3,200

Required:

1. Suppose Keller 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 Keller’s products under a traditional costing system. (Round your intermediate calculations and final answers to 2 decimal places.)

3. Calculate Keller’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 Keller wanted to implement an ABC system. (Round your answers to 2 decimal places.)

5. Assuming an ABC system, assign overhead costs to each product based on activity demands.(Round your intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)

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

7. Calculate Keller’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 per unit of each product under the traditional system and ABC. (Round your answers to 2 decimal places.)

Answer 1

Part-1 Computation of Predetermined Overhead Rate

= Total Overhead/ Estimated Machine Hours = $11536 / 3200 hours = $3.605 per machine hour

Assigning Overhead to each Product - Keller
	Sandy Beach Model	Rocky River Model
Machine Hour (a)	1600	1600
Predetermined Overhead Rate (b)	$3.61	$3.61
Amount of Overhead Assigned (aXb)	$5,768.00	$5,768.00

Part-2 : Computation Production cost per unit
	Sandy Beach Model	Rocky River Model
Direct Material Cost	$20.00	$27.00
Direct Labour Cost	$13.30	$17.90
Overhead Cost (5768/1150), (5768/990)	$5.02	$5.83
Production cost per unit	$38.32	$50.73
Part-3 : Computation Gross Margin Per Unit
	Sandy Beach Model	Rocky River Model
Sales Price Per Unit	$82.30	$106.00
Less : Production Cost Per Unit	($38.32)	($50.73)
Gross Margin Per Unit	$43.98	$55.27

Part-4 Select the appropriate cost driver for each cost pool
Cost pools	Cost driver applicable
Setup Costs	Number Of Setups
Quality Control	Quality Control
Maintenance	Maintenance

Computation of Activity Rate
Cost pools	Overhead cost	Cost driver	Activity rate
Setup costs	$2,360.00	40	$59.00	Per Setup
Quality Control	$5,400.00	450	$12.00	Per Inspection
Maintenance	$3,776.00	3200	$1.18	Per Machine Hour

Part-5 : Assgining Overhead to each Product - Keller - As per ABC
	Activity Rate	Sandy Beach Model		Rocky River Model
		No. of Activity	Assigned Overhead	No. of Activity	Assigned Overhead
Setup costs	59	15.00	885.00	25.00	1,475.00
Quality Control	12	200.00	2,400.00	250.00	3,000.00
Maintenance	1.18	1,600.00	1,888.00	1,600.00	1,888.00
Total Overhead cost assigned			5,173.00		6,363.00

Part-6 : Computation Production cost per unit
	Sandy Beach Model	Rocky River Model
Direct Material Cost	$20.00	$27.00
Direct Labour Cost	$13.30	$17.90
Overhead Cost (5173/1150), (6363/990)	$4.50	$6.43
Production cost per unit	$37.80	$51.33
Part-7 : Computation Gross Margin Per Unit
	Sandy Beach Model	Rocky River Model
Sales Price Per Unit	$82.30	$106.00
Less : Production Cost Per Unit	($37.80)	($51.33)
Gross Margin Per Unit	$44.50	$54.67

Part-8 : Comparision of Gross Margin
	Sandy Beach Model	Rocky River Model
Gross Margin (Traditional)	$43.98	$55.27
Gross Margin (ABC)	$44.50	$54.67