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 $21.86 per unit, while product B has been assigned $13.35 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 Drivers Activity Driver Consumption
Machine setup $360,000 Setup hours 4,000
Materials handling 85,000 Pounds of materials 17,000
Electric power 50,000 Kilowatt-hours 25,000

The following cost information pertains to the production of A and B, just two of Hakara's many products:

A B
Number of units produced 4,000 10,000
Direct materials cost $39,000 $38,000
Direct labor cost $22,000 $27,000
Number of setup hours 100 200
Pounds of materials used 2,000 2,000
Kilowatt-hours 2,000 4,000

Required:
Use activity-based costing to determine a unit cost for each product.

Answer 1

Unitary cost A= $21

Unitary cost B= $10.1

Step-by-step explanation:

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

Predetermined manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Machine setup= 360,000/4,000= $90 per setup hour

Materials handling= 85,000/17,000= $5 per pound

Electric power= 50,000/25,000= $2 per killowat

Now, we can allocate overhead to each product:

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

Product A:

Machine setup= 90*100= $9,000

Materials handling= 5*2,000= $10,000

Electric power= 2*2,000= $4,000

Total= $23,000

Product B:

Machine setup= 90*200= $18,000

Materials handling= 5*2,000= $10,000

Electric power= 2*4,000= $8,000

Total= $36,000

Finally, the total cost and unitary cost:

Product A:

Total cost= 39,000 + 22,000 + 23,000= $84,000

Unitary cost= 84,000/4,000= $21

Product B:

Total cost= 38,000 + 27,000 + 36,000= $101,000

Unitary cost= 101,000/10,000= $10.1