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	$	30		$	48
Direct labor cost per unit		20			30
Sales price per unit		300			500
Expected production per month		700	units		400	units

    

Harbour has monthly overhead of $175,200, which is divided into the following cost pools:

Setup costs	$	68,800
Quality control		58,400
Maintenance		48,000
Total	$	175,200

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

	Home	Work	Total
Number of setups	42	58	100
Number of inspections	340	390	730
Number of machine hours	1,700	1,300	3,000

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

Solution 1:
Overhead Assigned (Traditional Costing)
Home model	$99,280
Work model	$75,920
Total overhead costs	$175,200

Solution 2:
Computation of product cost per unit (Traditional)
Particulars	Home	Work
Direct material cost per unit	$30.00	$48.00
Direct labor cost per unit	$20.00	$30.00
Overhead cost per unit Home - $99,280 / 700 Work - $75,920 / 400	$141.83	$189.80
Production cost per unit	$191.83	$267.80
Solution 3:
Computation of Gross Margin per unit (Traditional)
Particulars	Home	Work
Selling price per unit	$300.00	$500.00
Production cost per unit	$191.83	$267.80
Gross Margin per unit	$108.17	$232.20

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	$68,800.00	Nos of setups	100	$688.00	42	$28,896	58	$39,904
Quality control	$58,400.00	Nos of inspections	730	$80.00	340	$27,200	390	$31,200
Maintenance	$48,000.00	Machine hours	3000	$16.00	1700	$27,200	1300	$20,800
Total	$175,200.00					$83,296.00		$91,904.00
Nos of units						700		400
Overhead cost per unit						$118.99		$229.76

Solution 6:
Computation of product cost per unit - Harbour Company - ABC
Particulars	Home	Work
Direct material cost per unit	$30.00	$48.00
Direct labor cost per unit	$20.00	$30.00
Overhead cost per unit	$118.99	$229.76
Production cost per unit	$168.99	$307.76
Solution 7:
Computation of Gross Margin per unit - ABC
Particulars	Home	Work
Selling price per unit	$300.00	$500.00
Production cost per unit	$168.99	$307.76
Gross Margin per unit	$131.01	$192.24
Solution 8:
Comparison of Gross Margin under traditional system and ABC
Particulars	Home	Work
Gross Margin ( Traditional)	$108.17	$232.20
Gross Margin (ABC)	$131.01	$192.24