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 700units 400units
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 your intermediate calculations.)
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.)

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:

                                              Home                        Work

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

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