Question

Harwell, Inc. uses a traditional volume-based costing system in which direct labor hours are the allocation base. Harwell produces two different products: Product A, which uses 40,000 direct labor hours, and Product B, which uses 60,000 direct labor hours. Harwell is considering switching to an ABC system by splitting its manufacturing overhead cost of $400,000 across three activities: Setup, Production, and Finishing. Under the traditional volume-based costing system, the predetermined overhead rate is $4.00/direct labor hour. Under the ABC system, the cost of each activity and proportion of the activity drivers used by each product are as follows:________.
Total Cost Proportion used by Proportion used by
Product A Product B
Design (Engineering Hours) $ 50,000 30 % 70 %
Production (Direct Labor Hours) $ 300,000 40 % 60 %
Inspection (Batches) $ 50,000 20 % 80 %
Required:
a. Calculate the indirect manufacturing costs assigned to Product A under the traditional costing system.
b. Calculate the indirect manufacturing costs assigned to Product B under the traditional costing system.
c. Calculate the indirect manufacturing costs assigned to Product A under the ABC system.
d. Calculate the indirect manufacturing costs assigned to Product B under the ABC system.
e. Which product is under-costed and which is over-costed under the volume-based cost system compared to ABC?

Answer 1

Answer:

(a) $160,000 (b) $240,000 (c) $145,000 (d) $255,000 (e) The Product A is over costed  while the Product B is under costed

Explanation:

Solution

Given that:

(a) The Indirect Manufacturing Cost = 40,000 hours x $4

= $160,000

(b) Indirect Manufacturing Cost = 60,000 hours x $4

= $240,000

(c) The Indirect Manufacturing Cost = ($50,000 x 30%) + ($300,000 x 40%) + ($50,000 x 20%)

= $15,000 + $120,000 + $10,000

= $145,000

(d) The Indirect Manufacturing Cost = ($50,000 x 70%) + ($300,000 x 60%) + ($50,000 x 80%)

= $35,000 + $180,000 + $40,000

= $255,000

(e) Which of the product is over-costed and which is under-costed under the volume-based cost system compared to ABC?

The Product A is over costed while the Product B is under costed.