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	$	37		$	68
Direct labor cost per unit		18			38
Sales price per unit		364			565
Expected production per month		710	units		430	units

Harbour has monthly overhead of $179,120, which is divided into the following cost pools:

Setup costs	$	83,160
Quality control		56,760
Maintenance		39,200
Total	$	179,120

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

	Home	Work	Total
Number of setups	40	68	108
Number of inspections	340	305	645
Number of machine hours	1,100	1,700	2,800

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 and calculate the production cost per unit for each of Harbour’s products under a traditional costing system. Calculate Harbour’s gross margin per unit for each product under the traditional costing system.

2. Assuming an ABC system, assign overhead costs to each product based on activity demands. Calculate Harbour’s gross margin per unit for each product under an ABC system. Compare the gross margin of each product under the traditional system and ABC

Answer 1

1. traditional costing uses single cost driver to allocate cost to its products.

here we will find cost per machine hour and than we will allocate to two products.

cost per machine hour = Total cost/machine hours

$179,120/2800 machine hours

=$63.97 per machine hour

gross margin = sales- manufacturing cost

	Home	Work
sales	$364	$565
Less: direct material	$37	$68
direct labor	$18	$38
overhead cost allocated per unit	$99.11	$252.90
Gross margin per unit	$209.89[364-37-18-99.11]	$206.1 [565-68-38-252.90]

overhead cost per unit= cost per hour* machine hours / number of units produced

Home=$63.97*1100 / 710 units

=$99.11 per unit

work = $63.97*1700 /430 units

=$252.90

2) ACTIVITY BASED COSTING allocates overhead cost on the basis of cost driver most relative to the activity.

here we will allocate set up costs on the basis of number of set ups

quality control costs on the basis of number of inspections

maintenance cost on the basis of number of machine hours

activity	costs	cost driver	cost per activity
set ups costs	$83,160	108 setups	$770 per set up	[83160/108]
quality control	$56,760	645 inspections	$88 per inspection	[56760/645]
maintenance	$$39,200	2800 machine hours	$14 per machine hour	[39200/2800]

cost allocation to products

cost per activity	home	work
$770 per set up	$30,800[$770*40 setups]	$52,360[$770*68setups]
$88 per inspection	$29,920[$88*340]	$26,840[$88*305]
$14 per machine hour	$15,400[$14*1100]	$23,800[$14*1700]
Total costs	$76,120[30800+29920+15400]	$103,000[52360+26840+23800]
overhead cost per unit	$107.21[$76120/710]	$239.53[$103,000/430]

gross margin

	Home	Work
sales	$364	$565
Less: direct material	$37	$68
direct labor	$18	$38
overhead cost allocated per unit	$107.21	$239.53
Gross margin per unit	$201.79[364-37-18-107.21]	$219.47 [565-68-38-239.53]

comparing the gross margin

	Home	work
traditional system	$209.89	$206.1
ABC system	$201.79	$219.47