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	$	19.70		$	27.10
Direct labor cost per unit		13.70			17.90
Sales price per unit		82.30			105.00
Expected production per month		1,250	units		980	units

      

Keller has monthly overhead of $10,424, which is divided into the following cost pools:

Setup costs	$	2,240
Quality control		5,324
Maintenance		2,860
Total	$	10,424

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

	Sand Beach	Rocky River	Total
Number of setups	15	20	35
Number of inspections	150	290	440
Number of machine hours	1,300	1,300	2,600

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.)

	Overhead Assigned
Sandy Beach Model
Rocky River Model
Total Overhead Cost

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.)

	Sandy Beach	Rocky River
Unit Cost

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.)

	Sandy Beach	Rocky River
Gross Margin

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.)

Setup Costs
Quality Control
Maintenance

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.)

	Overhead Assigned to Sandy Beach	Overhead Assigned to Rocky River
Setup Cost
Quality Control
Maintenance
Total Overhead Cost

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.)

	Sandy Beach	Rocky River
Unit Cost

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.)

	Sandy Beach	Rocky River
Gross Margin

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

	Sandy Beach	Rocky River
Gross Margin(traditional)
Gross Margin(ABC)

Answer 1

• All working forms part of the answers
• All amount, except Units and Hours and no of activity drivers, are in “$”
• Working

Total Overhead	10424
Total machine hours	2600
Overhead rate per machine hours	$4.009231

• Requirement 1: Overhead cost assigned using traditional costing

	Machine Hours	Overhead rate per machine hours	Overhead Assigned
Sandy Beach Model	1300	4.009231	5212
Rocky River Model	1300	4.009231	5212
Total Overhead Cost			10424

• Requirement 2: Traditional costing-Products unit costs

	Sandy Beach	Rocky River
Overhead cost	5212	5212
Units	1250	980
Overhead cost per unit	4.17	5.32
Direct materials per unit	19.7	27.1
Direct labor per unit	13.7	17.9
Unit Cost (TOTAL)	37.57	50.32

• Requirement 3: traditional costing-Gross Margin

	Sandy Beach	Rocky River
Sales price per unit	82.3	105
Unit Cost (TOTAL)	37.57	50.32
gross margin per unit	44.73	54.68

• Requirement 4: Activity rates

Activities	Cost (A)	No. of activity drivers (B)	Activity Rates (A/B)
Setup Costs	2240	35 setups	64
Quality Control	5324	440 inspections	12.1
Maintenance	2860	2600 machine hours	1.1
Total	10424

• Requirement 5: Overhead assigned on the basis of ABC method

			Sandy Beach		Rocky River
Activities	Cost	Activity Rate	No. of cost drivers	Overhead Assigned to Sandy Beach	No. of cost drivers	Overhead Assigned to Rocky River
Setup Cost	2240	64	15	960	20	1280
Quality Control	5324	12.1	150	1815	290	3509
Maintenance	2860	1.1	1300	1430	1300	1430
Total Overhead Cost	$10424			$4205		$6219

• Requirement 6: Product cost using ABC method

	Sandy Beach	Rocky River
Overhead cost as per ABC	4205	6219
Units	1250	980
Overhead cost per unit	3.36	6.35
Direct materials per unit	19.7	27.1
Direct labor per unit	13.7	17.9
Unit Cost (TOTAL)	36.76	51.35

• Requirement 7: Gross margin per unit-ABC method

	Sandy Beach	Rocky River
Sales price per unit	82.3	105
Unit Cost (TOTAL)	36.76	51.35
gross margin per unit	45.54	53.65

• Requirement 8: Comparison

	Sandy Beach	Rocky River
Gross Margin(traditional)	44.73	54.68
Gross Margin(ABC)	45.54	53.65