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 $10.80 per unit, while product B has been assigned $3.60 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 Machine setup Materials handling Electric power Activity Costs Cost Drivers $360,000 Setup hours 100,000 Pounds of materials 40,000 Kilowatt-hours Activity Driver Consumption 4,000 20,000 40,000 The following cost information pertains to the production of A and B, just two of Hakara's many products: А Number of units produced Direct materials cost Direct labor cost Number of setup hours Pounds of materials used Kilowatt-hours B 4,000 20,000 $42,000 $54,000 $24,000 $40,000 400 200 1,000 3,000 2,000 4,000 Required: 1. Use activity-based costing to determine a unit cost for each product. (Round your answers to 2 decimal places.)

Answer 1

Answer -

Calculation of cost per unit using activity based costing -

	Particulars	Calculation	Product A	Product B
I	Direct materials	Given in question	$42000	$54000
II	Direct labor	Given in question	$24000	$40000
III	Machine Setup	Product A = ($360000 / 4000 Setup hours) * 400 Setup hours Product B = ($360000 / 4000 Setup hours) * 200 Setup hours	$36000 -	- $18000
IV	Materials Handling	Product A = ($100000 / 20000 Pounds) * 1000 Pounds Product B = ($100000 / 20000 Pounds) * 3000 Pounds	$5000 -	- $15000
V	Electric Power	Product A = ($40000 / 40000 Kilowatt-hours) * 2000 Kilowatt-hours Product B = ($40000 / 40000 Kilowatt-hours) * 4000 Kilowatt-hours	$2000 -	- $4000
VI	Total Product Cost	I + II + III + IV + V	$109000	$131000
VII	Units produced	Given in question	4000 units	20000 units
Cost per unit		VI / VII	$27.25	$6.55