Question

Hazelnut Corp. manufactures lawn ornaments. It currently has two product lines, the basic and the luxury. Hazelnut has a total of $165,591 in overhead. The company has identified the following information about its overhead activity cost pools and the two product lines:

Activity Cost Cost Driver Cost Assigned Quantity/ Quantity
Pools to Pool Amount /Amount
Consumed Consumed
by Basic by Luxury
Materials
handling Number of moves $3,666 18 moves 60 moves
Quality Number of
inspections $37,125 200 100
inspections inspections
Machine
maintenance Number of
machine hours $124,800 6,000 3,600
machine hours machine hours
Required:
1. Suppose Hazelnut 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 activity rates for each cost pool in Hazelnut’s ABC system.
3. Calculate the amount of overhead that Hazelnut will assign to the basic line if it uses an ABC system.
4. Determine the amount of overhead Hazelnut will assign to the luxury line if it uses an ABC system.

Answer 1

Hazelnut Corp.

1. The amount of overhead assigned to each product line:

Basic = $103,500 (6,000 * $17,25)

Luxury = $62,100 (3,600 * $17.25)

2. Activity Rate based on ABC System:

Overhead Rates :

Materials handling $3,666/78 moves = $47 per move

Quality $37,125/300 inspections = $123.75 per inspection

Machine maintenance $124,800/9,600 m.hours = $13 per machine hour

3. The amount of overhead that Hazelnut will assign to the basic line if it uses an ABC system is:

= $103,596

4. The amount of overhead that Hazelnut will assign to the luxury line if it uses an ABC system is:

= $61,995

Step-by-step explanation:

a) Data and Calculations:

Total overhead = $165,591

Activity Cost Cost Driver Cost Assigned Quantity/ Quantity

Pools to Pool Amount /Amount

Consumed Consumed

by Basic by Luxury

Materials

handling Number of moves $3,666 18 moves 60 moves

Quality Number of

inspections $37,125 200 100 inspections

Machine

maintenance No. of machine

hours $124,800 6,000 3,600 m.hours

Total overhead costs $165,591

Traditional costing system with machine hours as the cost driver:

Overhead assigned to each product line:

Basic Luxury Total

Machine hours 6,000 3,600 9,600

Overhead rate = $165,591/9,600 = $17.25

Overhead assigned $103,500 $62,100

Overate rate:

Materials handling $3,666 78 moves = $47 per move

Quality $37,125 300 inspections = $123.75 per inspection

Machine maintenance $124,800 9,600 m.hours = $13 per machine hour

Assignment of costs:

Basic Luxury

Materials handling $47 * 18 = $846 $47 * 60 = $2,820

Quality $123.75 * 200 = 24,750 $123.75 * 100 = 12,375

Machine maintenance $13 * 6,000 = 78,000 $13 * 3,600 = 46,800

Total overhead assigned $103,596 $61,995