Question

Harwell, Inc. produces two different products, Product A and Product B. Harwell uses a traditional volume-based costing system in which direct labor hours are the allocation base. Harwell is considering switching to an ABC system by splitting its manufacturing overhead cost of $850,000 across three activities: Setup, Production, and Finishing. Under the traditional volume-based costing system, the predetermined overhead rate is $8.50/direct labor hour. Under the ABC system, the rate for each activity and usage of the activity drivers are as follows:

	Activity Rate			Usage by Product A			Usage by Product B
Setup (Batches)	$	100	/hour		330			170
Production (Direct Labor Hours)	$	3.00			49,000			51,000
Finishing (Machine Hours)	$	1,220			56			440

Required:

a. Calculate the indirect manufacturing costs assigned to Product A under the traditional costing system.

b. Calculate the indirect manufacturing costs assigned to Product B under the traditional costing system.

c. Calculate the indirect manufacturing costs assigned to Product A under the ABC system.

d. Calculate the indirect manufacturing costs assigned to Product B under the ABC system.

e. Which product is under-costed and which is over-costed under the volume-based cost system compared to ABC?

Answer 1

a.

Indirect manufacturing costs assigned to product A under the traditional costing system = Number of direct labor hours of A X Overhead rate = 49,000 X 8.5 = $ 416,500

b.

Indirect manufacturing costs assigned to product B under the traditional costing system = Number of direct labor hours of B X Overhead rate = 51,000 X 8.5 = $ 433,500

c.

Indirect manufacturing costs assigned to product A under the ABC system

Cost	Driver	Rate	Usage by A	Amount
Setup	Batches	$    100	330	$   33,000
Production	Direct Labor Hours	$         3	49000	$ 147,000
Finishing	Machine Hours	$ 1,220	56	$   68,320
				$ 248,320

d.

Cost	Driver	Rate	Usage by B	Amount
Setup	Batches	$    100	170	$   17,000
Production	Direct Labor Hours	$         3	51000	$ 153,000
Finishing	Machine Hours	$ 1,220	440	$ 536,800
				$ 706,800

e.

As compared to ABC Product A is overcosted and B is undercosted