Question

PA4-3 Selecting Cost Drivers, Assigning Costs Using Activity Rates [LO 4-1, 4-3, 4-4, 4-6 ]

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		$	64
Direct labor cost per unit		23			33
Sales price per unit		351			572
Expected production per month		600	units		490	units

    

Harbour has monthly overhead of $213,390, which is divided into the following cost pools:

Setup costs	$	90,470
Quality control		64,020
Maintenance		58,900
Total	$	213,390

        

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

	Home	Work	Total
Number of setups	44	65	109
Number of inspections	340	320	660
Number of machine hours	1,600	1,500	3,100

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.)

	overhead assigned
Home Model
Work Model
Total overhead Cost	$

    
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.)

	home	work
Unit Cost

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.)

	HOME	WORK
GROSS MARGIN

4. Select the appropriate cost driver for each cost pool and calculate the activity rates if Harbour wanted to implement an ABC system.

Setup cost
quality control
Maintenance

    
5. Assuming an ABC system, assign overhead costs to each product based on activity demands.

	overhead assigned to home	Overhead assigned to work
Setup costs
quality control
Maintenance
TOTAL OVERHEAD COST	$	$

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.)

	HOME	WORK
unit cost

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.)

	home	work
Gross margin

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

	home	work
gross margin (traditional)
Gross margin (ABC)

Answer 1

Solution 1:

Overhead assigned to home model = $213,390 * 1600/3100 = $110,137

Overhead assigned to work model = $213,390 * 1500 / 3100 = $103,253

Solution 2:

Computation of product cost per unit (Traditional)
Particulars	Home	Work
Direct material cost per unit	$39.00	$64.00
Direct labor cost per unit	$23.00	$33.00
Overhead cost per unit Home - $110,137 / 600 Work - $103,253 / 490	$183.56	$210.72
Production cost per unit	$245.56	$307.72

Solution 3:

Computation of Gross Margin per unit (Traditional)
Particulars	Home	Work
Selling price per unit	$351.00	$572.00
Production cost per unit	$245.56	$307.72
Gross Margin per unit	$105.44	$264.28

Solution 4 & 5:

Computation of activity rate and Allocation of overhead to Products - ABC - Harbour
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Home		Work
					Usage	Allocated Costs	Usage	Allocated Costs
Setup costs	$90,470.00	Nos of setups	109	$830.00	44	$36,520	65	$53,950
Quality control	$64,020.00	Nos of inspections	660	$97.00	340	$32,980	320	$31,040
Maintenance	$58,900.00	Machine hours	3100	$19.00	1600	$30,400	1500	$28,500
Total	$213,390.00					$99,900.00		$113,490.00
Nos of units						600		490
Overhead cost per unit						$166.50		$231.61

Solution 6:

Computation of product cost per unit - Harbour Company - ABC
Particulars	Home	Work
Direct material cost per unit	$39.00	$64.00
Direct labor cost per unit	$23.00	$33.00
Overhead cost per unit	$166.50	$231.61
Production cost per unit	$228.50	$328.61

Solution 7:

Computation of Gross Margin per unit - ABC
Particulars	Home	Work
Selling price per unit	$351.00	$572.00
Production cost per unit	$228.50	$328.61
Gross Margin per unit	$122.50	$243.39

Solution 8:

Comparison of Gross Margin under traditional system and ABC
Particulars	Home	Work
Gross Margin ( Traditional)	$105.44	$264.28
Gross Margin (ABC)	$122.50	$243.39
Gross Margin per unit	-$17.06	$20.89