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	$	19.00		$	27.50
Direct labor cost per unit		14.90			18.40
Sales price per unit		83.80			107.00
Expected production per month		1,230	units		930	units

      

Keller has monthly overhead of $11,925, which is divided into the following cost pools:

Setup costs	$	2,520
Quality control		5,742
Maintenance		3,663
Total	$	11,925

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

	Sand Beach	Rocky River	Total
Number of setups	16	24	40
Number of inspections	200	295	495
Number of machine hours	1,650	1,650	3,300

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

Solution 1:

Predetermined overhead rate = Estimated overhead / Estimated machine hours

= $11,925 / 3300 = $3.613636363 per hour

Overhead allocated:

Sandy beach = $11,925 * 1650/3300 = $5,963

Rocky river = $11,925 * 1650/3300 = $5,963

Solution 2:

Computation of unit cost of each product - Traditional costing - Keller Company
Particulars	Sandy Beach	Rocky River
Direct material	$23,370.00	$25,575.00
Direct labor	$18,327.00	$17,112.00
Manufacturing overhead	$5,963.00	$5,963.00
Total Cost	$47,660.00	$48,650.00
Nos of units	1230	930
Cost per unit	$38.75	$52.31

Solution 3:

Computation of Gross profit per unit - Traditional costing - Keller Company
Particulars	Sandy Beach	Rocky River
Selling price per unit	$83.80	$107.00
Cost per unit	$38.75	$52.31
Gross Profit per unit	$45.05	$54.69

Solution 4:

Determination of activity rate for each activity
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate
					Setup Cost	$2,520.00	Nos of setups	40	$63.00
Quality Control	$5,742.00	Nos of inspections	495	$11.60
Maintenance	$3,663.00	Nos of machine hours	3300	$1.11

Solution 5:

Allocation of Overhead - Activity based costing
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Sandy Beach		Rocky River
					Usage	Allocated Costs	Usage	Allocated Costs
Setup Cost	$2,520.00	Nos of setups	40	$63.00	16	$1,008	24	$1,512
Quality Control	$5,742.00	Nos of inspections	495	$11.60	200	$2,320	295	$3,422
Maintenance	$3,663.00	Nos of machine hours	3300	$1.11	1650	$1,832	1650	$1,832
Total	$11,925.00					$5,160		$6,766

Solution 6:

Computation of unit cost of each product - Activity Based costing - Keller company
Particulars	Home Fire Extinguisher	Commercial Fire Extenguisher
Direct material	$23,370	$25,575
Direct labor	$18,327	$17,112
Manufacturing overhead	$5,160	$6,766
Total Cost	$46,857	$49,453
Nos of units	1230	930
Unit Product Cost	$38.09	$53.17

Solution 7:

Computation of Gross profit per unit - Activity Based Costing - Keller Company
Particulars	Sandy Beach	Rocky River
Selling price per unit	$83.80	$107.00
Cost per unit	$38.09	$53.17
Gross Profit per unit	$45.71	$53.83

Solution 8:

Comparison of Gross Margin per unit - Traditional Vs ABC
Particulars	Traditional Costing	Activity based costing
Sandy Beach	$45.05	$45.71
Rocky river	$54.69	$53.83