Question

Hakara Company has been using direct labor costs as the basis for assigning overhead to its many products. Under this allocation system product A has been assigned overhead of $2.82 per unit while product B has been assigned $13.58 per unit. Management feels that an ABC system will provide a more accurate allocation of the overhead costs and has collected the following cost pool and cost driver information:
Cost Pools Activity Costs Cost Driver Driver Consumption
Machine setup $ 158,000 Setup hours 2,000
Materials handling 112,000 Pounds of materials 16,000
Electric power 25,000 Kilowatt-hours 25,000
The following cost information pertains to the production of A and B, just two of its many products:
A B
Number of units produced 5,000 10,000
Direct materials cost $32,000 $41,000
Direct labor cost $41,000 $38,000
Number of setup hours 100 200
Pounds of materials used 1,000 1,000
Kilowatt-hours 2,000 4,000
Use activity-based costing to determine a unit cost for each product. (Round your final answers to 2 decimal places.)

Answer 1

Answer:

Unitary cost A : $17.98

Unitary cost B : $10.58

Explanation:

First, we need to calculate the predetermined overhead rate for each activity.

The predetermined manufacturing overhead rate = Total estimated overhead costs for the period / Total amount of allocation base

Machine setup

= 158,000/2,000

= $79 per setup hour

Materials handling

= 112,000/16,00

= $7 per pound

Electric power

= 25,000/25,000

= $1 per kilowatt.

Now, we can allocate overhead to each product

Allocated MOH = Estimated manufacturing overhead rate × Actual amount of allocation base

Product A

Machine setup

= $79 × 100

= $7,900

Materials handling

= $7 × 1,000

= $7,000

Electric power

= $1 × 2,000

= $2,000

Total = $16,900

Product B

Machine setup

= $79 × 200

= $15,800

Materials handling

= $7 × 1,000

= $7,000

Electric power

= $1 × 4,000

= $4,000

Total = $26,800

Finally, the total cost and the unitary cost

Product A.

Total cost

= Direct materials + Direct labor + Allocated MOH

= $32,000 + $41,000 + $16,900

= $89,900

Unitary cost

= Total cost/Number of units produced.

= $89,900/5,000

= $17.98

Product B

Total cost

= Direct materials + Direct labor + Total allocated MOH

= $41,000 + $38,000 + $26,800

= $105,800

Unitary cost

= Total cost/Number of units produced

= $105,800/10,000

= $10.58