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	$	19.60		$	27.20
Direct labor cost per unit		14.30			17.60
Sales price per unit		83.20			105.00
Expected production per month		1,190	units		980	units

      

Keller has monthly overhead of $10,424, which is divided into the following cost pools:

Setup costs	$	2,880
Quality control		5,369
Maintenance		3,220
Total	$	11,469

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

	Sand Beach	Rocky River	Total
Number of setups	16	29	45
Number of inspections	110	345	455
Number of machine hours	1,400	1,400	2,800

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.)

	Overhead Assigned
Sandy Beach Model
Rocky River Model
Total Overhead Cost

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.)

	Sandy Beach	Rocky River
Unit Cost

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.)

	Sandy Beach	Rocky River
Gross Margin

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.)

Setup Costs
Quality Control
Maintenance

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.)

	Overhead Assigned to Sandy Beach	Overhead Assigned to Rocky River
Setup Cost
Quality Control
Maintenance
Total Overhead Cost

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.)

	Sandy Beach	Rocky River
Unit Cost

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.)

	Sandy Beach	Rocky River
Gross Margin

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

	Sandy Beach	Rocky River
Gross Margin(traditional)
Gross Margin(ABC)

Answer 1

Solution

Keller Company

1. Determination of the amount of overhead assigned to each product assuming traditional costing system and machine hours as cost driver:

Overhead allocated to each product = predetermined overhead rate x machine hours used

Predetermined overhead rate = total overhead cost/machine hours

Total overhead cost = $11,469 per month

Machine hours = 2,800

Predetermined overhead rate = $4.096 per machine hour

	Overhead assigned
Sandy Beach Model	$5,734
Rocky River Model	$5,735
Total	$11,469

Computations:

	Machine Hours	Predetermined overhead	Overhead assigned	number of units	overhead cost per unit
Sandy Beach Model	1,400 MH	$4.096	$5,734	1,190	$4.82
Rocky River Model	1,400	$4.096	$5,735	980	$5.85

2. Production cost per unit under traditional costing system:

	Sandy Beach	Rocky River
Unit Cost	$38.72	$50.65

Computations:

	Sandy Beach	Rocky River
Direct materials	$19.60	$27.20
Direct labor	$14.30	$17.60
Overhead	$4.82	$5.85
Total product cost	$38.72	$50.65

3. Calculation of gross margin per unit for each product under the traditional costing system:

	Sandy Beach	Rocky River
Gross Margin	$44.48	$54.35

Computations:

	Sandy Beach	Rocky River
Sales price per unit	$83.20	$105
unit cost	$38.72	$50.65
Gross Margin	$44.48	$54.35

4. Cost driver and activity rates under ABC system:

Activity	Cost	Activity Usage	Activity Rate
Setup costs	$2,880	45 setups	$64
Quality Control	$5,369	455 inspections	$11.80
Maintenance cost	$3,220	2,800 machine hours	$1.15

5. Assigning overhead costs to each product based on activity demands:

Sandy Beach
Activity	Activity Usage	Activity Rate	Overhead Assigned
Setup costs	16 setups	$64	$1,024
Quality Control	110 inspections	$11.80	$1,298
Maintenance cost	1,400 MH	$1.15	$1,610
Total overhead assigned			$3,932

Total overhead assigned		$3,932
number of units		1,190
overhead assigned per unit		$3.30
Rocky River Activity Activity Usage Activity Rate Overhead Assigned Setup costs 29 setups $64 $1,856 Quality Control 345 inspections $11.80 $4,071 Maintenance cost 1,400 MH $1.15 $1,610 Total overhead assigned $7,537 Total overhead assigned $7,537 number of units 980 overhead assigned per unit $7.69

6. Production cost per unit under each of the traditional costing system:

	Sandy Beach	Rocky River
Unit Cost	$38.72	$52.49

Computations:

	Sandy Beach	Rocky River
Direct materials	$19.60	$27.20
Direct labor	$14.30	$17.60
Overhead	$3.30	$7.69
Total product cost	$37.20	$52.49
	Sandy Beach	Rocky River
Unit Cost	$38.72	$52.49

7. Calculation of gross profit margin:

	Sandy Beach	Rocky River
Gross Margin	$121.92	$52.51
Computations: Sandy Beach Rocky River Sales price per unit $83.20 $105 unit cost $38.72 $52.49 Gross Margin $121.92 $52.51

8. Comparison of gross margin under the two methods:

	Sandy Beach	Rocky River
Gross Margin (Traditional)	$44.48	$54.35
Gross Margin (ABC)	$121.92	$52.51