Question

PA4-1 (Algo) Assigning Costs Using Traditional System, ABC System (LO 4-1, 4-3, 4-4, 4-6) Hazelnut Corp. manufactures lawn ornaments. It currently has two product lines, the basic and the luxury. Hazelnut has a total of $155,581 in overhead. The company has identified the following information about its overhead activity cost pools and the two product lines: Cost Activity Cost Pools Cost Driver to Pool Materials handling Number of moves $ 3,311 Quality control Number of inspections $ 28,670 Machine maintenance Number of machine hours $123,600 Quantity/Amount Quantity/Amount Consumed by Consumed by Basic Luxury 12 moves 65 moves 240 inspections 120 inspections 5,900 machine hours 4,400 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. (Do not round intermediate calculations and round your final answers to the nearest whole dollar amount.) Basic Model Luxury Model Overhead Assigned Overhead Assigned 2. Calculate the activity rates for each cost pool in Hazelnut's ABC system. (Round your answers to the nearest whole dollar.) Activity Rates Materials Handling Quality Control Machine Maintenance per Move per Inspection per Machine Hour

Answer 1

1. The amount of overhead assigned to each product line under the traditional costing system with machine hours as the cost driver:

Baisc Model $ 89,119.00 Overhead Assigned Luxury Model $ 66,462.00 Overhead Assigned

$ Total overhead Baisc: machine hrs consumed Luxury: machine hrs consumed Total machine hours Overhead rate 155,581 а 5900 L b 4400 10300d =b+c 15.10 ad $ Overhead assigned: Basic (5900 hours $15.10) Luxury (4400 hours x $15.10 Total $ 89,119.00 $ 66,462.00 $ 155,581.00

• Under the traditional system, Hazelnut uses machine hours as the cost driver. It means the overheads are assigned to each product line based on the machine hours used by each product line.

2. The activity rates for each cost pool in Hazelnut's ABC system:

Materials Handling Quality Control Machine Maintenance Activity Rates $ 43.00 per move $ 80.00 per inspection $ 12.00 per machine hour

Work

Activity cost pool Cost driver Overhead assigned to pool Cost driver level Activity rate a Materials Handling Number of moves Quality Control Number of inspections Machine Maintenance Number of machine hours Total $ $ $ $ 3,311 28,670 123,600 155,581 77 moves 360 inspections 10300 machine hours $ $ $ b 43.00 80.00 12.00

Cost driver Basic model - Luxury model - Cost driver level Cost driver level 12 65 Number of moves Number of inspections Number of machine hours Total Cost driver level 77 moves 360 inspections 10300 machine hours 240 5900 120 4400

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

Basic Model Amount Materials Handling Quality Control Machine Maintenance Total Overhead Assigned Computation (activity rate x cost driver consumed) $43 per move x 12 moves $80 per inspection x 240 inspections $12 per machine hr. x 5900 machine hrs $ $ $ $ 516 19,200 70,800 90,516

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

Luxury Model Amount Materials Handling Quality Control Machine Maintenance Total Overhead Assigned Computation (activity rate x cost driver consumed) $43 per move x 65 moves $80 per inspection x 120 inspections $12 per machine hr. x 4400 machine hrs $ $ $ $ 2,795 9,600 52,800 65,195

6. ABC system is more accurate.

• The traditional system haphazardly assigns overhead costs to the cost objects (product lines) disregarding the components of the cost using a single cost driver - machine hours. Under ABC, the costs are grouped into activity pools and then the costs are related to the cost objects based on the actual activity consumed by the cost objects.