PB43 Selecting Cost Drivers, Assigning Costs Using Activity Rates LO 41, LO 43, LO 44, LO 46

Berry Good Company makes two types of energy drinks, cherry and strawberry. Basic production information follows:

	Cherry	Strawberry
Direct materials cost per unit	$0.70	$0.80
Direct labor cost per unit	0.25	0.25
Sales price per unit	2.50	2.50
Expected production per month	140,000 units	190,000 units

Berry Good has monthly overhead of $159,670, which is divided into the following cost pools:

Setup costs	$ 75,000
Quality control	25,000
Maintenance	40,500
Engineering	19,170
Total	$159,670

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

	Cherry	Strawberry	Total
Number of setups required	40	60	100
Number of inspections	275	350	625
Number of machine hours	1,500	750	2,250
Number of engineering hours	65	70	135

Required:

1. Suppose Berry Good used a traditional costing system with machine hours as the cost driver. Determine the amount of overhead assigned to each product line.

2. Calculate the production cost per unit for each of Berry Goods products under a traditional costing system.

3. Calculate Berry Goods gross margin per unit for each product under the traditional costing system.

4. Select the appropriate cost driver for each cost pool and calculate the activity rates if Berry Good 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 Berry Goods products with an ABC system.

7. Calculate Berry Goods gross margin per unit for each product under an ABC system.

8. Compare the gross margin of each product under the traditional system and ABC. Explain the change in profitability for each product.