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	$	39		$	66
Direct labor cost per unit		23			31
Sales price per unit		360			578
Expected production per month		720	units		490	units

    

Harbour has monthly overhead of $179,660, which is divided into the following cost pools:

Setup costs	$	70,840
Quality control		57,620
Maintenance		51,200
Total	$	179,660

        

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

	Home	Work	Total
Number of setups	40	52	92
Number of inspections	340	330	670
Number of machine hours	1,700	1,500	3,200

Required:            
1(a) 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.)

    
1(b) 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.)

1(c) 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.)

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

    
2(b) Assuming an ABC system, assign overhead costs to each product based on activity demands.

2(c) 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.)

3. 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.)

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

Answer 1

Harbour Company

1a. Determination of the amount of overhead assigned to each product under traditional costing system using machine hours as basis:

Predetermined overhead rate = total overhead cost/total machine hours

Total overhead cost = $179,660

Total machine hours =3,200

Predetermined overhead rate = $179,660/3,200 =$56.14 per machine hour

	Home	Work
overhead rate per machine hour	$56.14	$56.14
machine hours	1,700	1,500
total overhead assigned	$95,444	$84,216
number of units	720	490
overhead cost per unit	$132.56	$171.87

Hence, the amount of overhead assigned to each product is as follows,

Home - $95,444

Work - $84,216

1b. calculation of production cost per unit for each product under traditional costing system:

Total unit cost per product:
	Home	Work
Direct material cost	$39	$66
Direct labor	$23	$31
overhead	$132.56	$171.87
Total cost	$194.56	$268.87

1c. Calculation of gross margin per unit for each product under the traditional costing system:

Gross margin per unit:
	Home	Work
Sales price per unit	$360	$578
Direct material cost	$39	$66
Direct labor	$23	$31
Overhead	$132.56	$171.87
Total cost	$194.56	$268.87
Gross margin	$165.44	$309.13

2a. Activity rates under ABC system –

Cost Pool	estimated cost	Cost driver	Total usage	activity rate
Setup costs	$70,840	Number of setups	92 setups	$770 per setup
Quality control	$57,620	number of inspections	670 inspections	$86 per inspection
Maintenance	$51,200	number of machine hours	3,200 MH	$16 pr MH

Note – activity rate = estimated cost/total usage

2b. Assign overhead cost to each products based on activity demands and ABC system:

Home
Cost Pool	Activity Demand	Activity Rate	Overhead assigned
Setup costs	40 setups	$770 per setup	$30,800
Quality control	340 inspections	$86 per inspection	$29,240
Maintenance	1,700 MH	$16 per MH	$27,200
Total overhead assigned			$87,240
production in units			720
overhead assigned per unit			$121.17

Note –

1. Overhead assigned = activity demand x activity rate
2. Overhead assigned per unit = total overhead assigned/production in units

= $87,240/720 = $121.17 per unit

Work
Cost Pool	Activity Demand	Activity Rate	Overhead assigned
Setup costs	52 setups	$770 per setup	$40,040
Quality control	330 inspections	$86 per inspection	$28,380
Maintenance	1,500 MH	$16 per MH	$24,000
Total overhead assigned			$92,420
production in units			490
overhead assigned per unit			$220.04

Note –

1. Overhead assigned = activity demand x activity rate
2. Overhead assigned per unit = total overhead assigned/production in units

= $92,420/420 = $220.04 per unit

2c. Calculation of production cost per unit for each product under ABC system:

Production cost per unit –

	Home	Work
Direct material cost	$39	$66
Direct labor	$23	$31
Overhead	$121.17	$220.04
Total cost	$183.17	$317.04

1. Calculation of gross margin per unit for each product under ABC system:

Gross margin per unit:
	Home	Work
Sales price per unit	$360	$578
Direct material cost	$39	$66
Direct labor	$23	$31
Overhead	$121.17	$220.04
Total cost	$183.17	$317.04
Gross margin	$176.83	$260.96

1. Comparison of gross margin of each product under the traditional system and ABC:

Gross Margin per unit:
	Home	Work
Traditional System	$165.44	$309.13
ABC System	$176.83	$260.96