Answer:
Harbour Company
1. Overhead rate, using traditional costing system with machine hours as the cost driver:
Predetermined rate = $175,200/3,000 = $58.40
Overhead Cost assigned to each product:
Home Work
Expected production 1,700 1,300
Cost assigned = $99,280 $75,920
2. Production cost per unit:
Home Work
Expected production 700 units 400 units
Direct materials cost $21,000 (30 * 700) $19,200 (48 * 400)
Direct labor cost 14,000 (20 * 700) 12,000 (30 * 400)
Overhead cost 99,280 75,920
Total costs $134,280 $107,120
Cost per unit $191.83 $267.80
3. Gross margin per unit:
Home Work
Sales price per unit $300.00 $500.00
Cost price per unit 191.83 267.80
Gross margin per unit $108.17 $232.20
4. Activity Rates, using ABC system:
Cost Pools: Cost Drivers Usage Rates
Setup costs $ 68,800 Number of setups 100 $688
Quality control 58,400 Number of inspections 730 $80
Maintenance 48,000 Number of machine hours 3,000 $16
5. Assignment of overhead costs to each product, using ABC:
Rate Home Work
Setup costs $ 68,800 $688 $28,896 (42* $688) $39,904 (58*$688)
Quality control 58,400 $80 27,200 (340*$80) 31,200 (390*$80)
Maintenance 48,000 $16 27,200 (1,700*$16) 20,800 (1,300*$16)
Total overhead $175,200 $104,096 $91,904
6. Production costs:
Home Work
Expected production 700 units 400 units
Direct materials cost $21,000 (30 * 700) $19,200 (48 * 400)
Direct labor cost 14,000 (20 * 700) 12,000 (30 * 400)
Overhead cost 104,096 91,904
Total costs $139,096 $123,104
Cost per unit $198.71 $307.76
7. Gross margin per unit:
Home Work
Sales price per unit $300.00 $500.00
Cost price per unit 198.71 307.76
Gross margin per unit $101.29 $192.24
8. Gross margins per unit compared:
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Traditional costing system $108.17 $232.20
ABC costing system $101.29 $192.24
ABC system looks more equitable than the traditional costing system as the gross margin per unit is reduced for each product line.
Explanation:
a) Data and Calculations:
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
Monthly overhead costs = $175,200
Cost Pools: Cost Drivers
Home Work Total
Setup costs $ 68,800 Number of setups 42 58 100
Quality control 58,400 Number of inspections 340 390 730
Maintenance 48,000 Number of machine hours 1,700 1,300 3,000
Total $ 175,200
