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	$	39		$	67
Direct labor cost per unit		20			36
Sales price per unit		359			574
Expected production per month		740	units		380	units

Harbour has monthly overhead of $193,040, which is divided into the following cost pools:

Setup costs	$	79,120
Quality control		59,520
Maintenance		54,400
Total	$	193,040

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

	Home	Work	Total
Number of setups	43	49	92
Number of inspections	330	310	640
Number of machine hours	1,700	1,500	3,200

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

Requirement-1:

Overhead Assigned
Home Model (193,040/3,200*1,700)	102,553
Work Model (193,040/3,200*1,500)	90,487
Total overhead costs	193,040

Requirement-2:

Production Cost per unit	Home	Work
Direct Material	39	67
Direct labor	20	36
Applied overhead	138.59 (102,553/740)	238.12 (90,487/380)
Production cost per unit	$ 197.59	$ 341.12

Requirement-3:

Gross margin per unit	Home	Work
Sale price per unit	359	574
Production cost per unit	197.59	341.12
Gross margin per unit	161.41	232.88

Requirement-4:

Activity cost	Estimated overhead	Cost driver	Activity rate
Setup costs	79,120	92	860	per setup
Quality control	59,520	640	93	per inspection
Maintenance	54,400	3,200	17	per machine hour

Requirement-5: Assuming ABC System

	Home	Work
Setup costs	36,980 (43*860)	42,140 (49*860)
Quality control	30,690 (330*93)	28,830 (310*93)
Maintenance	28,900 (1,700*17)	25,500 (1,500*17)
Total overhead costs	96,570	96,470

Requirement-6:

Production Cost per unit	Home	Work
Direct Material	39	67
Direct labor	20	36
Applied overhead	130.5 (96,570/740)	253.87 (96,470/380)
Production cost per unit	$ 189.50	$ 256.87

Requirement-7:

Gross margin per unit	Home	Work
Sale price per unit	359	574
Production cost per unit	189.50	253.87
Gross margin per unit	169.50	320.13

Requirement-8:

	Home	Work
Gross margin (Traditional)	161.41	232.88
Gross margin (ABC)	169.50	320.13

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