Question

Harrison Company makes two products and uses a conventional costing system in which a single plantwide predetermined overhead rate is computed based on direct labor-hours. Data for the two products for the upcoming year follow:
These products are customized to some degree for specific customers.
(b) Management is considering an activity-based costing system in which half of the overhead would continue to be allocated on the basis of direct labor-hours and half would be allocated on the basis of engineering design time. This time is expected to be distributed as follows during the upcoming year:
Compute the unit product costs for the two products using the proposed ABC system.

Answer 1

Harrison Company utilizes a traditional costing approach that calculates a single predefined overhead rate for the whole facility based on direct worker hours and produces two goods. The two products' data for the future year are as follows: For certain clientele, some items are somewhat tailored. The unit product costs for the two products using the proposed ABC system is Overhead allocation

Calculation of Overhead allocation :

Half Overhead on the basis of traditional costing system:

Manufacturing overhead costs = (870,000/2) = $435,000

Total direct labor hours needed = 59,000

Overhead rate per direct labor hour = 435,000/ 59,000= $7.37

Half Overhead on the basis of ABC system:

Manufacturing overhead costs = (870,000/2) = $435,000

Total Engineering design time = 8,700

Overhead rate per engineering hour = 435,000 / 8,700= $50

Unit product cost-

 Direct materials cost per unit $29.40 $22.60

Direct labor cost per unit 20.00 4.40

Overhead cost per unit:    

Half Overhead on the basis of traditional costing system (7.37*0.80), (7.37*0.30) 5.90 2.21

Half Overhead on the basis of ABC system [($50*5800)/28,000],[($50*2900)/122,000] 10.36 1.19

Unit Product Cost $65.66 $30.40

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