Selecting Cost Drivers Assigning Costs Using Activity Rates

Selecting Cost Drivers, Assigning Costs Using Activity Rates

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.)

2. Calculate the production cost per unit for each of Keller’s products under a traditional costing system. (Round your intermediate calculations and final answers to 2 decimal places.)

Unit Cost:

3. Calculate Keller’s gross margin per unit for each product under the traditional costing system. (Round your intermediate calculations and final answers to 2 decimal places.)

Gross Margin:

4. Select the appropriate cost driver for each cost pool and calculate the activity rates if Keller wanted to implement an ABC system. (Round your answers to 2 decimal places.)

5. Assuming an ABC system, assign overhead costs to each product based on activity demands.(Round your intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)

Setup Costnot

Quality Controlnot

Maintenancenot

Total Overhead Cost

6. Calculate the production cost per unit for each of Keller’s products with an ABC system. (Round your intermediate calculations and final answers to 2 decimal places.)

Unit Cost:

7. Calculate Keller’s gross margin per unit for each product under an ABC system. (Round your intermediate calculations and final answers to 2 decimal places.)

Gross Margin:


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

Sandy Beach Model
Rocky River Model
Total Overhead Cost

Keller Company makes two models of battery-operated boats, the Sandy Beach and the Rocky River. Basic production information follows Sandy Rocky River Beach Direct materials cost per unit Direct labor cost per unit Sales price per unit Expected production per montlh $27.60 17.60 105.00 $18.70 13.20 82.40 1,190 units 960 units Keller has monthly overhead of $13,182, which is divided into the following cost pools Setup costs Quality control Maintenance $ 3,250 6,260 3,672 $ 13,182 Total The company has also compiled the following information about the chosen cost drivers Sand Beach Rocky River Total Number of setups Number of inspections Number of machine hours 10 100 1,700 40 435 1,700 50 535 3,400

Solution

Answer 1 Predetermined overhead application rate = Total Overhead cost / Total machine hours = $13182 / 3400 hours = $3.88 per machine hour Calculation of Amount overhead assigned to each product line Sandy Beach Model = 1700 hours * $3.88 $6,591.00 Rocky River Model = 1700 hours * $3.88 $6,591.00 Total Overhead cost $13,182.00 Answer 2 Calculate the production cost per unit for each of Keller’s products (Traditional costing system) Sandy Beach Model Rocky River Model Direct Material cost per unit $18.70 $27.60 Direct Labour cost per unit $13.20 $17.60 Overhead cost per unit = $6591 / 1190 units $5.54 = $6591 / 960 units $6.87 Production cost per unit $37.44 $52.07 Answer 3 Calculation of Keller’s gross margin per unit for each product under the traditional costing system. Sandy Beach Model Rocky River Model Sales price per unit $82.40 $105.00 Less : Production cost per unit $37.44 $52.07 Gross Margin per unit $44.96 $52.93 Answer 4 Select the appropriate cost driver for each cost pool Cost pools Cost driver applicable Setup costs Number of setups Quality Control Number of inspections Maintenance Number of machine hours Calculation of the activity rates if Keller wanted to implement an ABC system Cost pools Overhead cost Cost driver Activity rate A B A/B Setup costs $3,250.00 50 setups $65.00 per setup Quality Control $6,260.00 535 inspections $11.70 per inspection Maintenance $3,672.00 3400 machine hours $1.08 per machine hour Answer 5 Assignment of overhead costs to each product based on activity demands. Cost pools Sandy Beach Model Rocky River Model Setup costs $650.00 $2,600.00 Quality Control $1,170.09 $5,089.91 Maintenance $1,836.00 $1,836.00 Total Overhead cost assigned $3,656.09 $9,525.91 Answer 6 Calculate the production cost per unit for each of Keller’s products (ABC costing system) Sandy Beach Model Rocky River Model Direct Material cost per unit $18.70 $27.60 Direct Labour cost per unit $13.20 $17.60 Overhead cost per unit = $3656.09 / 1190 units $3.07 = $9525.91/ 960 units $9.92 Production cost per unit $34.97 $55.12 Answer 7 Calculation of Keller’s gross margin per unit for each product under the ABC costing system. Sandy Beach Model Rocky River Model Sales price per unit $82.40 $105.00 Less : Production cost per unit $34.97 $55.12 Gross Margin per unit $47.43 $49.88 Answer 8 Gross Margin Comparison Sandy Beach Model Rocky River Model Gross Margin (Traditional) $44.96 $52.93 Gross Margin (ABC) $47.43 $49.88