Question

PA4-4 (Algo) Selecting Cost Drivers, Assigning Costs Using Activity Rates [LO 4-1, 4-3, 4-4, 4-6] 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 $ 19.70 $ 27.80 Direct labor cost per unit 13.10 18.80 Sales price per unit 83.20 106.00 Expected production per month 1,210 units 980 units Keller has monthly overhead of $11,272, which is divided into the following cost pools: Setup costs $ 2,170 Quality control 5,940 Maintenance 3,162 Total $ 11,272 The company has also compiled the following information about the chosen cost drivers: Sandy Beach Rocky River Total Number of setups 15 20 35 Number of inspections 120 375 495 Number of machine hours 1,550 1,550 3,100 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

1	Overhead rate=Total overhead cost/Total number of machine hours=11272/3100=$ 3.636129 per machine hour
	Overhead cost assigned:
					Sandy Beach	Rocky River
	Overhead rate			a	3.636129	3.636129
	Number of machine hours			b	1550	1550
	Overhead cost assigned			a*b	5636	5636
2	Production cost per unit:
					Sandy Beach	Rocky River
	Direct materials cost				19.7	27.8
	Direct labor cost				13.1	18.8
	Overhead cost per unit			(Note:1)	4.66	5.75
	Total				37.46	52.35
	Note:1
	Overhead cost per unit:
					Sandy Beach	Rocky River
	Overhead cost assigned			a	5636	5636
	Expected production			b	1210	980
	Overhead cost per unit				4.66	5.75
3	Gross margin per unit:
					Sandy Beach	Rocky River
	Sales price per unit				83.2	106
	Less: Production cost per unit				37.46	52.35
	Gross margin per unit				45.74	53.65
4	Activity			Overhead cost	Cost driver		$	Activity rate
				a			b	a/b
	Setup costs			2170	No.of setups		35	62	Per setup
	Quality control			5940	No.of inspections		495	12	Per inspection
	Maintenance			3162	No.of machine hours		3100	1.02	Per MH
				11272
5	Overhead assigned
					Sandy beach	Rocky river
	Activity		Activity rate		Cost driver usage	Overhead assigned	Cost driver usage	Overhead assigned
			a		b	c=a*b	d	e=a*d
	Setup costs		62	Per setup	15	930	20	1240
	Quality control		12	Per inspection	120	1440	375	4500
	Maintenance		1.02	Per MH	1550	1581	1550	1581
	Total					3951		7321
6	Production cost per unit:
					Sandy Beach	Rocky River
	Direct materials cost				19.7	27.8
	Direct labor cost				13.1	18.8
	Overhead cost per unit			(Note:2)	3.27	7.47
	Total				36.07	54.07