Question

Keller Company makes two models of battery operated boats, the Sandy Beach and the Rocky River. Basic production information follows: Direct materials cost per unit Direct labor cost per unit Sales price per unit Expected production per month Sandy Beach $19.10 15.10 83.70 1,240 units Rocky River $ 27.20 18.40 105.00 920 units Keller has monthly overhead of $11,756, which is divided into the following cost pools: Setup costs Quality control Maintenance Total $ 3,050 5,400 3,306 $ 11,756 The company has also compiled the following information about the chosen cost drivers: Sandy Beach Rocky River Total Number of setups 12 38 50 Number of inspections 200 250 450 Number of machine hours 1,450 1,450 2,900 Required: 1. Suppose Keller 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.) Overhead Assigned Sandy Beach Model Rocky River Model Total Overhead Cost $ 0

Answer 1

In traditional Costing, All the Overheads are assigned through One Common Basis. Like here Machine Hours.

Total Overheads= $11,756

Number of machine Hours= $ 2900

machine hour= 11756/2900

                     = $4.054

particulars	Sandy Beach	Rocky River
Direct Material(multiply with units because per unit given of Direct material) Direct Labour Cost (multiply with per unit because data is given in per unit in question ) Overhead cost 4.054* 1450 Total Production Cost	19.10 * 1240= 23684 15.10 * 1240=18,724 5878.30 48286.30	27.20 * 920= 25,024 18.40 * 920=16928 5878.30 47830.30

Overhead Cost= Sandy Beach= $ 5878.30

                         Rocky River =$5878.30

        total                                   $ 11756.60

2.

Computation of Prouction cost per unit under Traditional costing System:

Production cost per unit = Total Production Cost/ Number of units

SANDY BEACH= Total Production cost= $48286.30

Number of Units= 1240

thus Production cost per unit= 48286.30/1240= $38.94 per unit

ROCKY RIVER

Total Production cost= $47830.30

Number of units= 920 units

Thus Production cost per unit= 47830.30/920

                                          = $51.98 per unit

3. Computation of Gross Margin:

Here Sale is Given, Total cost we have. Simply can calculate Gross Margin:

Particulars Sale less:Total Production cost Gross margin Number of Units Gross margin per unit

Sandy Beach 83.70 * 1240= 103,788 48286.30 55,501.70 1240 55501.7/1240= $44.76

Rocky River 105 * 920= 96,600 47830.30 48769.70 920 48769.70/920= $53.01

4.

Computation of costs under ABC system:

Particulars                                     Cost Driver                                                    Activity Rate

Set up Cost                                 Number of Set ups                                      3050/50 = $61per set up

Quality Control                             Number of Inspections                                 5400/450 = $12 per inspection

Maintenance                                Number of Machine Hours                         3306/2900= $1.14 per Machine Hour

5. Overhead Cost assigned to each Overhead under ABC system:

here previus we calculate activity Rate thus now can calculate Total Overhead cost

Particulars                  Overhead assigned to Sandy Beach                  Overhead assigned to Rocky River

Set up Cost                           61 * 12=   732                                                           61* 38=2318

Quality Control                       12 * 200= 2400                                                         12*250= 3000

Maintenance                          1.14 *1450= 1653                                                      1.14* 1450= 1653

Total Overhead Cost                                   4785                                                                        6971

6. Production Cost per unit under ABC System:

For calculate Production cost per unit we have total production cost and Number of Production units thus easily can calculate Production cost per unit:

                                              Sandy Beach                                   Ricky River

Direct Material                          23684                                                 25024

Direct Labour                            18724                                                16928

Overhead Cost                            4785                                                 6971

Total Production cost                 47,193                                                 48,923

Number of Units                          1240                                                    920

Production cost per unit              47193/ 1240                                        48923/920

                                              = $ 38.06 per unit                                      = $53.18 per unit

7.

Gross Margin under ABC Costing:

Particulars                                     Sandy Beach                                  Rocky River

Sale                                         83.7* 1240= 1,03,788                              105*920= 96,600

Total Production cost                      47,193                                                   48,923

Gross Margin                                              56,595                                                      47,677

Number of units                                            1240                                                            920

Gross Margin per unit                56595/1240= $45.64 per unit                              47677/920= $51.82per unit

8.

Comparison of Gross Margin per unit under Traditional Costing and ABC Costing:

Figures in $ per unit

Particulars                                       Sandy Beach    Rocky River

Gross margin (Traditional Cost)    44.76    53.01

Gross Margin(ABC)                             45.64                                               51.82

As we see gross margin per unit in Traditional Costing is More than ABC costing. But production cost is less in ABC system.