Question

Hazelnut Corp. manufactures lawn ornaments. It currently has two product lines, the basic and the luxury. Hazelnut has a total of $164,423 in overhead. The company has identified the following information about its overhead activity cost pools and the two product lines: Activity Cost Pools Cost Driver Materials handling Number of moves Quality control Number of inspections Machine maintenance Number of machine hours Cost Assigned to Pool $ 3,328 $ 30,295 $130,800 Quantity/Amount Quantity/Amount Consumed by Consumed by Basic Luxury 15 moves 49 moves 220 inspections 110 inspections 6,000 machine hours 4,900 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. Overhead assigned using traditional costing system with machine hours as the cost driver:

Baisc Model $ 90,508.00 Overhead Assigned Luxury Model $ 73,915.00 Overhead Assigned

Work:

$ а b Total overhead Baisc: machine hrs consumed Luxury: machine hrs consumed Total machine hours Overhead rate 164,423 6000 l 4900 10900 15.08 d= b + c ad $ Overhead assigned: Basic (6000 hours $15.08) Luxury (4900 hours x $15.08) Total $ 90,508.00 $ 73,915.00 $164,423.00

2. Activity rates for each cost pool under ABC system:

Materials Handling Quality Control Machine Maintenance Activity Rates $ 52.00 per move $ 92.00 per inspection $ 12.00 per machine hour

Work:

Cost driver Number of moves Number of inspections Number of machine hours Basic model - Luxury model - Cost driver level Cost driver level 15 49 220 110 6000 4900 Total Cost driver level 64 moves 330 inspections 10900 machine hours

Overhead assigned to pool Cost driver level Activity rate Activity cost pool Cost driver Materials Handling Number of moves Quality Control Number of inspections Machine Maintenance Number of machine hours Total $ $ $ $ 3,328 30,295 130,800 164,423 bab 64 moves 52.00 330 inspections $ 92.00 10900 machine hours $ 12.00

3. Overhead assigned to basic line using ABC system:

Basic Model Amount Materials Handling Quality Control Machine Maintenance Total Overhead Assigned Computation (activity rate x cost driver consumed) $52 per move x 15 moves $92 per inspection x 220 inspections $12 per machine hr. x 6000 machine hrs $ $ $ $ 780 20,240 72,000 93,020

4. Overhead assigned to luxury line using ABC system:

Luxury Model Amount Materials Handling Quality Control Machine Maintenance Total Overhead Assigned Computation (activity rate x cost driver consumed) $52 per move x 49 moves $92 per inspection x 110 inspections $12 per machine hr. x 4900 machine hrs $ $ $ $ 2,548 10,120 58,800 71,468

5. ABC system is more accurate.

• Under the traditional system, a plant-wide rate is used to assign overheads based on a single cost-driver, i.e. machine-hours, disregarding the actual level of activities of each product line.
• ABC takes into account the actual activities used by each product.