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	$	43		$	66
Direct labor cost per unit		16			37
Sales price per unit		354			569
Expected production per month		800	units		330	units

Harbour has monthly overhead of $187,120, which is divided into the following cost pools:

Setup costs	$	79,680
Quality control		56,440
Maintenance		51,000
Total	$	187,120

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

	Home	Work	Total
Number of setups	43	53	96
Number of inspections	320	360	680
Number of machine hours	1,200	2,200	3,400

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

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Harbor Company
Answer 1
Calculation of Predetermined OH Rate	Total	Note
Total Machine Hours	3,400.00	A
Total Manufacturing overhead	187,120.00	B
Predetermined OH Rate	55.04	C=B/A

Allocated OH as per Predetermined OH Rate	Home	Work	Total	Note
Total Machine Hours	1,200.00	2,200.00		See A
Predetermined OH Rate	55.04	55.04		See C
Allocated OH	66,042.35	121,077.65	187,120.00	D=A*C
Units produced	800.00	330.00		E
Allocated OH per unit	82.55	366.90		F=D/E

Answer 2	Home	Work
Direct Materials	43.00	66.00
Direct Labor	16.00	37.00
Allocated OH per unit	82.55	366.90
Cost per unit	141.55	469.90
Answer 3	Home	Work
Sell price	354.00	569.00
Cost per unit	141.55	469.90
Gross margin per unit	212.45	99.10

Answer 4
Activity cost pool	Cost Driver
Setup costs	Number of Setups
Quality Control	Number of inspections
Maintenance	Machine hours

Answer 5
Calculation of ABC rates for overhead		G	H	I=G/H
Activity cost pool	Cost Driver	Cost	Activity used	ABC rates
Setup costs	Number of Setups	79,680.00	96.00	830.00
Quality Control	Number of inspections	56,440.00	680.00	83.00
Maintenance	Machine hours	51,000.00	3,400.00	15.00
Total Cost assigned		187,120.00

Answer 6		See I	J	K=I*J	L	M=I*L
Allocation table			Home	Work
Activity cost pool	Activity Measure	ABC Rates	Activity used	Cost assigned	Activity used	Cost assigned
Setup costs	Number of Setups	830.00	43.00	35,690.00	53.00	43,990.00
Quality Control	Number of inspections	83.00	320.00	26,560.00	360.00	29,880.00
Maintenance	Machine hours	15.00	1,200.00	18,000.00	2,200.00	33,000.00
Total Cost assigned				80,250.00		106,870.00
Budgeted production (units)				800.00		330.00
Cost assigned per unit				100.31		323.85

Answer 6
Product cost- ABC System	Home	Work
Direct Materials	43.00	66.00
Direct Labor	16.00	37.00
Allocated OH per unit	100.31	323.85
Product cost	159.31	426.85
Answer 7	Home	Work
Sell price	354.00	569.00
Cost per unit	159.31	426.85
Gross margin per unit	194.69	142.15
Answer 8
Comparison	Home	Work
Gross margin - Traditional costing	212.45	99.10
Allocation under ABC	159.31	426.85
Difference	53.13	(327.75)